OPPOSITION LIKELY FOR DIRECTV DEAL, BUT APPROVAL IS EXPECTED

News Corp. said late Wed. it would buy 34% of Hughes Electronics (including DirecTV) for $6.6 billion in cash and stock. It said it would acquire GM’s 19.9% stake in Hughes and further 14.1% of Hughes from public shareholders and GM’s pension and other benefit plans. At closing, News Corp.’s 34% ownership interest will be transferred to Fox Entertainment Group (FEG), 80.6%-owned News Corp. subsidiary, in exchange for $4.5 billion promissory note and 74.2 million shares in Fox at $27.99 per share, increasing News Corp.’s equity interest in FEG to 82%.

On completion of acquisition, News Corp. Chmn. Rupert Murdoch will become chmn. of Hughes, while News Corp.’s former co-COO Chase Carey will become pres.-CEO of Hughes, News Corp. said. It said Hughes’s Senior Exec. Vp Eddy Hartenstein would be vice chmn., reporting to Carey. Public shareholders and GM’s pension and other benefit plans own all of GM’s Class H common stock (GMH), representing 80.1% of economic interest in Hughes, News Corp. said. It said GM retained 19.9% of economic interest in Hughes. Under proposed transaction, News Corp. said, “split- off” would occur in which shareholders would exchange GMH tracking stock for shares of Hughes.

“The alignment of Fox’s valuable content assets and DirecTV’s distribution platform will provide significant benefits to consumers and greatly enhance the future businesses of both companies,” Murdoch said. He said company would make its programing available to all multichannel distributors for nondiscriminatory prices, terms and conditions, and would open DirecTV platform to all competing programmers.

As part of acquisition, News Corp. and DirecTV also agreed to abide by FCC program access regulations for as long as those regulations were in place and News Corp. and Fox held interest in DirecTV. News Corp. said it would continue to make all of its national and regional programming available to all multichannel distributors on nonexclusive basis, and neither News Corp. nor DirecTV would discriminate against unaffiliated programming services with respect to price, terms or conditions of carriage on DirecTV platform.

Importance of competitive issues was quickly raised on Hill, where chmn. and ranking Democrat of Senate Antitrust Subcommittee, for example, issued statement on takeover. Sens. DeWine (R-O.) and Kohl (D-Wis.) said they would hold hearing on deal, as subcommittee did on proposed EchoStar takeover of Hughes Electronics and DirecTV, which failed because of regulatory objections: “We will need to examine this deal carefully as well to ensure that it does not harm consumers and producers in the media and video marketplaces.”

Consumers Union also weighed in, saying deal was “likely to lead to higher prices for both satellite TV and cable TV customers.” CU’s Gene Kimmelman said News Corp. could maximize its profits by raising prices for much more of its TV, cable and sports programming, rather than by cutting prices to compete for smaller pool of DBS customers. He also said deal came just as FCC was considering relaxing other media ownership limits: “Consumers Union believes that the News Corp.-DirecTV deal illustrates the danger of allowing one company to gain excessive control over local and national media properties.”

Despite that, partners are predicting deal can receive regulatory approval and close by end of year. In fact, deal terminates if it doesn’t close within 12 months, and News Corp. would receive $300 million breakup fee under certain circumstances. GM, in turn, would receive $150 million breakup fee if deal didn’t close because News Corp.’s stock price dipped too much.

Govt. reviews could be completed within 6-12 months, Legg Mason said in its analysis of deal. It predicted approval “could involve some speed bumps” but “no brick walls.” Its analysts said key issue could be ability of competitors to get access to News Corp. programming after deal, although they acknowledged that adequate News Corp. guarantees could solve that. Another issue is vertical integration, in which News Corp. would own programming and delivery systems, they said. Justice Dept. in past has sometimes required divestiture of some holdings to solve such problems. Some believe role of Liberty Media and John Malone in News Corp. also is likely to become issue.

It’s virtually inevitable that some objections will be raised by consumer groups, cable and small broadcaster interests and even EchoStar, one analyst said: “This is just too good an opportunity to pass up.” Besides, he said, if competition problems emerge later, it would be too late: “This is your one shot.”

News Corp. also will argue that consumers would benefit from DirecTV acquisition, officials said. They said benefits would include: (1) Bringing more innovative digital services to DBS. (2) Expanding local-into-local delivery of local TV stations via DBS by increased use of spot beam satellites. (3) “Committing” to expanded broadband deployment via satellite, particularly in rural areas.

Financial analysts were generally positive about impact of transaction for each company. Standard & Poor’s upgraded its Hughes rating to positive from developing, saying News Corp. “should provide operating and financial support” to DirecTV. It also noted that DirecTV was close to cash flow breakeven. Moody’s affirmed its rating for News Corp., based on fact that significant portion of purchase price was in form of stock: “We do not believe that there will be any negative impact on News Corp.’s fundamental credit metrics.” It said DirecTV should benefit in long term from synergies with News Corp. and its other satellite interests.

Deal could decrease News Corp.’s ability to benefit from eased U.S. media ownership limits, Legg Mason said. Rule changes could give News Corp. “significant new opportunities to expand its holdings” in TV stations, firm said, but spending money on DirecTV would reduce resources available for such acquisitions, potentially depressing prices for all TV stations. However, deal would increase Fox’s leverage with its network affiliate stations and could reduce enthusiasm for DTV, Legg Mason said.

DirecTV did say deal would have no immediate impact on its money-losing Latin America operations. It issued statement saying deal didn’t provide for combination of DirecTV Latin America with Sky Latin America, although new Hughes board could consider any potential efficiencies after deal closed.