Odds don't favor DirecTV-EchoStar

A merger between number-one direct broadcast satellite company DirecTV and number-two, EchoStar, is unlikely to pass regulatory muster, Washington observers said Monday.

The $32.3 billion deal's success in Washington would depend on whether antitrust authorities look at satellite TV companies as part of the overall multichannel universe or whether they feel DBS is a separate market that should be competitive within itself.

EchoStar Chairman Charlie Ergen believes his proposed purchase of General Motors' Hughes Electronics (which owns DirecTV) could be approved because of the efficiencies and additional satellite capacities that would be gained by merging the two companies. That would allow a merged DirecTV/EchoStar to offer customers in rural areas more local and cable channels as well as high-speed Internet service.

"This is a better deal overall for customers in rural America," Ergen said on a press conference call Monday morning. "That's the kind of positive dialogue we can have with regulatory authorities and it's something the skeptics haven't taken into consideration."

But skeptics say it's unlikely General Motors' board will accept Ergen's $32.3 billion all-stock offer because the company could lose a year waiting for uncertain regulatory approval. They also say the Justice Department isn't likely to agree with Ergen that this merger would be good for competition.

Blair Levin, an analyst with investment firm Legg Mason, says EchoStar would have to meet a "very significant burden of proof. There would have to be extraordinary efficiencies" gained by allowing DirecTV and EchoStar to merge and leave only one company in the sector.

"The EchoStar bid is a case of an existing competitor in a concentrated market seeking to purchase one of two rivals; as such, it would face a high hurdle in proving that the benefits of the merger outweigh the costs of eliminating a competitor," a Legg Mason analysis paper stated.

Levin and other attorneys believe a merger between News Corp. and DirecTV has a better chance of gaining regulatory approval, although that deal would face it's own problems. Regulators would be likely to add conditions to any approval that would require News Corp. and DirecTV to make its programming fairly available to competitors.

But no matter what happens, making the bid was a winning proposal for Ergen. If EchoStar's offer is accepted, Ergen will largely control the entire U.S. satellite TV industry. If it is rejected, News Corp. still will have to pay a higher price for DirecTV and its deal with DirecTV will be stalled a little while longer. - Paige Albiniak