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Cable industry wary as GM/EchoStar agree on Hughes

Sun, 10/28/2001 - 7:00pm
Anne Kerven

With a few choice words for General Motors' sale of Hughes Electronics, News Corp. walked out of talks Saturday and withdrew its offer for the unit. GM then agreed Sunday to sell Hughes to EchoStar for about $25 billion in stock and cash.

A key claim is that the combined company will provide a "meaningful competitor" to cable TV companies, GM says in a statement. But cable is taking a wait-and-see stance.

"Personally, I think it's a really bad idea," says National Cable Television Cooperative Inc. President and CEO Michael Pandzik. "I really hope Washington and the regulatory agencies give this some adult supervision."

Pandzik likens the merger to a potential one between AT&T Broadband and AOL Time Warner, the prospect of which has been roundly dissed by such entities as Walt Disney Co.

"It creates such a mammoth entity," he says. "There's so much wrong, I'm not sure where to start."

Small operators and programmers will find already tough markets and access tougher. The deal is a great idea, he adds, for DirecTV and EchoStar, who get "much more satellite transponder space. Together, it allows them to do more with what they've got," he says.

Pandzik says the merger may turn out well for rural households, "But it's hard to see how. The only thing that kept prices down before was competition."

What "rankles," too, he adds, is the 5 percent franchise fees cable operators pay to municipalities. DirecTV and EchoStar, he says, "pay nothing."

"Obviously, there was concern over who was going to pick up DirecTV," says Daniel Mulvenon, VP of member services at NCTC. "This consolidates the competition down into one giant. For consumers, it's the less desirable option."

"They're a meaningful competitor already," says National Cable Television Association spokesman David Beckwith. "With 17 million subscribers, EchoStar will be larger than any cable company." How the deal goes over with antitrust authorities remains to be seen, he says.

The two companies grew by about 45 percent last year, picking up about 5 million subscribers, something observers expect to continue this year.

Under the deal, GM would spin off Hughes, which would then merge with EchoStar, with headquarters in Littleton, Colo. The combined company would use EchoStar's name and take the DirecTV brand for the products and services. EchoStar chief Charlie Ergen would be chair and CEO of the new group.

EchoStar plans to raise $5.5 billion before closing, a figure supplemented by bridge loans of about $2.75 billion each from GM and Deutsche Bank. GM's commitment is secured by $2.75 billion in EchoStar stock held in a trust under Ergen's control, GM reports.

Under the Hughes spinoff, shareholders of Class H common stock would exchange share for share for new Hughes Class C common stock. In the merger, shareholders of Class A EchoStar common stock would trade one share for 1.3699 shares of Class A stock in the new entity.

GM shareholders must still approve the deal, and it must clear regulatory approvals.

News Corp. didn't drop the deal without comment, however. Citing GM's failure to decide on Hughes' future, "despite a year and a half of negotiations and numerous extended deadlines," Chair and CEO Rupert Murdoch issued a statement that the company had no option but to pull its proposal.

"Hughes would have been an excellent strategic fit for our global platforms, and we are disappointed with the Board's inaction in the face of an as-yet unfinanced counter proposal," he said in a prepared statement.

Murdoch also noted the move "means there will be no choice for millions of television consumers in rural America."

Murdoch said News Corp. would turn to its media businesses, "with this saga finally concluded."

GM said the merger would combine 1.8 million National Rural Telecommunications Cooperative and affiliate subscribers with more 14.9 million subscribers owned and operated by the combined company.

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