DIRECTV FINANCING PLAN MAY BE CONVENIENTLY TIMED, ANALYSTS SAY

DirecTV announced it would raise financing in 2 ways: (1) It planned to sell up to $1.4 billion in senior notes privately to qualified institutional buyers. Senior notes would be due 2013 and wouldn’t be registered under Securities Act or state securities laws, making notes unqualified for resale. (2) Additional $1.55 billion of financing would come from arrangement of new senior secured credit facilities. Credit facilities “will have a term of 5 to 7 years and will be secured by substantially all of DirecTV’s assets and guaranteed by all of DirecTV’s domestic subsidiaries,” company said. DirecTV expects to confirm financing by early March.

Spokesman said financing wasn’t strategic move and company would have to finance this year when last financing offer, worth $1.8 billion, ends in Aug. Financing through DirecTV would be better received by markets than through Hughes, he said: “DirecTV has a strong credit profile and there are more companies that can compare to DirecTV than with a conglomerate.” Once newest financing offer is completed, $1.8 billion financing will be terminated. Financing is expected “to enable Hughes to repay outstanding indebtedness under its existing credit facilities, to fund Hughes’s business plan through projected cash flow breakeven and for Hughes’s other corporate purposes,” DirecTV said.

Analysts weren’t convinced financing was unrelated to potential acquisition of DirecTV. Rupert Murdoch’s News Corp. has been considered potent winner of bidding for DirecTV component (CD Jan 8 p4). More recent reports cite talks between General Motors and SBC on potential acquisition of unit. Industry analyst Armand Musey said financing plan could indicate preparation for potential sale: “If Hughes can say that they're funded and they don’t need a partner, they have more leverage. If they can look like they have the wherewithal to stay independent, they will be more valuable to whoever acquires them.” Financing also could eliminate need for cash, either for Hughes or for acquirer, analysts said. “Essentially, the acquirer would have to come up with less cash to complete the deal. This scenario probably doesn’t apply to SBC because they probably have the money to buy Hughes, but maybe a smaller company would want to do this,” analyst William Kidd said. Industry analyst Tim Logue said financing plan raised question of who would hold debt: “Anyone looking to acquire DirecTV might see this as a barrier to the acquisition. Will the acquirer keep the debt? More importantly, will they be buying all of Hughes or just DirecTV?” Logue said that beyond question of debt, introducing plan implied that ownership issue might take longer to resolve than expected and company needed money in meantime.

Meanwhile, Legg Mason (LM) analysts issued paper on meaning of potential interest of SBC in Hughes/DirecTV. “We think if the deal is struck, the chances for approval are high, though over time it could raise issues that complicate the company’s message that it needs to be deregulated in order to build out new facilities,” they said. SBC bid would be considered vertical merger and could raise antitrust issues in terms of potential competition: (1) SBC could be potential competitor of DirecTV if certain technologies such as video-over-DSL were more developed. (2) SBC could be decreasing potential competition in broadband market because of diminished potential for satellite broadband alternative. LM analysts also said SBC bid “would indicate that SBC believes combating cable with an integrated bundle is the most urgent need for the company.” Company is in position to make several different investments in order to increase its presence in different markets and addressing “the video hole in its bundle of services” would indicate SBC’s greatest concern, they said. Analysts also suggested that bid for DirecTV would: (1) Reduce likelihood of major wireless deal involving SBC. (2) Reduce likelihood of deal between interexchange carrier and Bell companies. (3) Reduce likelihood SBC would build out fiber to home to compete with cable. (4) Create positive environment in short term for cable companies by raising price of DirecTV and creating uncertainty about its ownership. Current regulatory proceedings with FCC shouldn’t be affected by potential bid but could “create some problems for SBC in its efforts to argue for deregulation,” they said.