ECHOSTAR BID FOR DBS RIVAL FACES REGULATORY QUESTIONS
EchoStar CEO Charles Ergen continued to face questions Mon. about his company’s ability to get regulatory approval for its $32 billion bid for Hughes Electronics, including DirecTV. If accepted, offer would reduce number of multichannel TV competitors in most local markets to 2 from current 3 -- 2 DBS providers plus cable. Hughes officials had no comment.
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Ergen said merger would establish only fully competitive alternative to powerful U.S. cable providers, something he said was particularly important because of increasing consolidation among large cable providers. “There has been a lot of misinformed speculation about regulatory approval,” Ergen said. “We think this combination will receive regulatory approval in large part because it will be good for consumers.” He said cable operators’ rates were going up 2 and 3 times rate of inflation, and only way to put end to such increases was to have strong satellite provider to compete with cable.
Hughes, which has been in negotiations with Rupert Murdoch’s News Corp. for 18 months, seemingly faces significantly higher hurdle if its board elects to sell to EchoStar, analyst said. Report by Legg Mason said EchoStar bid was case of existing competitor in concentrated market seeking to purchase rival. As such it would confront obstacle of proving that benefits of merger outweighed costs of eliminating competitor. News Corp. bid, on other hand, presents case of vertical integration in which no existing competitor would be eliminated, report pointed out. While issues would be raised of possible discriminatory use of DirecTV distribution platform to favor News Corp.-affiliated programming, vertical mergers face significantly less govt. resistance, it said.
Ergen said cash payment was discussed in earlier negotiations with DirecTV management, but it wasn’t met with enthusiasm by Hughes. He said if cash payment became necessary, he would consider adding it to present offer. Despite risks, there’s no form of indemnification if deal is blocked by regulators, Ergen said: “We paid a premium for their stock and obviously the synergies are compelling… This is going to be an attractive deal for regulators because we're just not involved in the cable industry and we don’t have programming. We just have one option in mind and that’s to go and compete.” Synergies could reach $56 billion if a deal were struck, said EchoStar, which would provide Hughes shareholders with up to additional $37 billion net present value ($26 per share), making total value of EchoStar’s proposal as much as $49 per Hughes share. Ergen said synergies could provide GM shareholders with up to additional $11 billion net present value -- $20 per GM share -- making total value of EchoStar’s proposal as much as $38 per GM share.
Ergen sent letter to GM board making latest offer, bypassing GM Hughes management. He said Hughes management “recently informed us that they do not intend to pursue further discussions with EchoStar,” but said he was “confident” that GM shareholders would be receptive.
C.E. Unterberg Towbin analyst Patrick Fuhrmann said bidding war was a win-win situation for Hughes because it would drive up cost of purchase. “The negotiation with News Corp. was taking a long time to resolve,” he said. “GMH stock was slipping with the added additional uncertainty. A bidding war could mean a real turnaround for shareholders.” Furhmann also said that whichever company acquired Hughes would be under regulatory microscope, but he didn’t think any antitrust hurdles were insurmountable.
EchoStar spokesperson said company’s primary interest was in synergies combined company would create, and any other byproduct from bid was secondary.