NRTC-DirecTV Pact Pummels Pegasus

In an action that had the effect of beating up Pegasus Communications shares on Aug. 11, DirecTV Inc. and the National Rural Telecommunications Cooperative settled federal-court claims against each other agreed without paying each other monetary damages.

A previous ruling by Judge Lourdes Baird of the U.S. District Court for the Central District of California had already barred the NRTC from collecting punitive or compensatory damages if the challenge proceeded to trial.

The NRTC's agreement to distribute DirecTV programming will end when the DBS-1 satellite ends its useful life, or June 2008, whichever is later.

The NRTC and member companies that join the settlement will be guaranteed a successor agreement through June 30, 2011. After that, customers revert to DirecTV, which agreed to pay current service providers $150 for each customer transitioned.

NRTC CEO Bob Phillips said in a prepared statement he was pleased DirecTV was willing to negotiate what he termed a "fair and equitable settlement" with his organization and member companies.

"We look forward to the court's review, as we are confident in the terms agreed upon. When the details of this agreement are disclosed, they will show that the settlement provides NRTC DBS participants far more than would have been achieved in any trial," Phillips added.

This doesn't resolve related litigation between DirecTV and Pegasus, the NRTC's largest single participant.

DirecTV officials said the company believes the NRTC settlement resolves disputes with Pegasus over the duration of that company's contractual rights, for Pegasus' rights are derived from its participation in the NRTC.

But other disputes remain between Pegasus and DirecTV. The latter company sued Pegasus for $50 million alleging a breach of the marketing agreement between the two companies. The separate Pegasus-DirecTV trial was to start last week in Los Angeles, but was delayed again upon news of the NRTC settlement. Pegasus also has a patent infringement claim pending in Delaware.

After watching its stock plunge last Monday, Pegasus said it would "evaluate the proposed settlement and all other alternatives." It said its rights, including exclusive rights to distribute DirecTV in its rural territories, can't be altered, amended or modified by the NRTC or DirecTV without its consent.

Proposed settlement terms – particularly the $150-per-subscriber price tag – prompted analyst downgrades of Pegasus, and at closing Aug. 11 Pegasus lost 37% off its share price on Nasdaq, falling to $23.10, down $13.80.

DirecTV would retain the right to sell premium services in NRTC territories. The NRTC would bill and collect for these services and collect a share of 10% to 15% of the revenue through June 2011.

The settlement won't be final until after the U.S. District Court for the Central District of California reviews it for fairness within the next 45 to 60 days.