ECHOSTAR-HUGHES MERGER FACES TOUGH ANTITRUST REVIEW

There’s 50-50 chance DirecTV-EchoStar merger will be blocked by antitrust regulators, said former Justice Dept. Antitrust Div. Chief Don Baker. Baker, who worked as staffer 1966-1975, was appointed antitrust chief by President Ford in 1976, now is partner in Baker & Miller antitrust law firm. “Clearly there are a couple of different issues,” Baker told us. He and other attorneys said EchoStar faced uphill regulatory battle, but they said hiring of antitrust lawyer David Boies should help. Former DoJ telecom legal expert Don Russell now is top EchoStar lawyer.

EchoStar finished first in Hughes-DirecTV sweepstakes Sun. after Rupert Murdoch’s News Corp. pulled out after 18 months of negotiations. EchoStar won bidding with offer of $26 billion cash and stock to create media conglomerate with 16.7 million subscribers and 80% of satellite TV audience. Boards of GM and EchoStar approved deal. Hughes shareholders are expected to approve it in 4-6 months, EchoStar CEO Charles Ergen said. He will be named CEO of new EchoStar company, which is combined EchoStar-Hughes entity. It will use DirecTV brand name, he said. GM said transaction is expected to close in 2nd half of 2002. Transition team will consist of Hughes CEO Jack Shaw, DirecTV Chmn. Eddy Hartenstein, Ergen and EchoStar Pres. Michael Dugan.

Hughes shareholders will hold 53% of merged company’s shares to keep transaction tax-free. EchoStar will control 4 of 9 board seats and 36% of stock, GM retains 11%. Five of board members will be independent directors. Companies plan to continue to operate independently until transaction closes. EchoStar also promised to pay $600 million breakup fee and purchase Hughes subsidiary PanAmSat if deal fell through. PanAmSat is worth estimated $2.77 billion. Pegasus Communications remains wild card in transaction and some say it could block deal. Deal also is backed by $5.5 billion in bridge financing, including $2.75 billion that EchoStar has secured from Deutsche Bank and another $2.75 billion from GM backed by EchoStar stock from trust owned by Ergen, while company seeks additional financing from capital markets before closing.

Deal means there would be only one major DBS provider in U.S., which has caused concern on Capitol Hill, where at least 10 lawmakers have expressed serious reservations about supporting merger. News Corp., runner-up in Hughes sweepstakes, is expected to lobby hard against deal, some experts said. “Murdoch probably doesn’t want to make any arguments that they are separate markets, but that kind of statement may come back to bite him” in other deals, Baker said: “It’s going to be interesting how he deals with that problem.”

DoJ, rather than FTC, is likely to handle antitrust review, lawyers and analysts we talked to said. They said definition of merged companies’ market was key to whether deal was approved. They said that if satellite industry were viewed as just one multichannel video competitor in market that included cable, review should go smoothly, but if regulators determined satellite market was separate entity, then it probably would be killed. Most expected DoJ to handle antitrust review. “There will be naysayers, but I'm confident there will be no regulatory problem,” Ergen said.

Baker said he believed satellite TV was distinct market. He said concerns about rural markets would play heavily in any decision, especially if prices were likely to go up 10%- 20%. However, he said he expected EchoStar to argue that new digital cable was “going to be terrific” for consumers and it now was on same playing field as DBS, although he didn’t agree.

EchoStar “is going to have a tough sell” with regulators, predicted satellite attorney Philip Spector, who also represents News Corp.: “In many parts of the country, there are only one cable and 2 satellite providers.” Deal would reduce that to one DBS and one cable operator, he said: “You don’t have to be an expert in antitrust regulation to see this might create a problem.” Spector also believed issue was “going to be decided” at DoJ: “FTC handles cable things. If you recall, the last major satellite issue involving News Corp. transfer of license to PrimeStar was handled by DoJ.”

Ergen told analysts he was willing to sign agreement with govt. to put lid on price increases for subscribers in rural areas. He said EchoStar might drop opposition to sharing airways with competing TV and Internet services, as well as antitrust lawsuit against DirecTV. “We are going to work with regulators to eliminate their concerns,” Ergen said: “I don’t see a lot of changes in rural America. If it isn’t good for consumers across the board, then it doesn’t make sense.” He said 2 companies were working on 4-year plan to integrate resources and technology. He expects to cut $4.5 billion from combined companies annual operating costs after 2 years. “We can reduce the programming costs and hopefully pass that onto consumers in the form of lower prices,” Ergen said.

EchoStar acquisition faces “risky antitrust review,” Legg Mason said, predicting Justice would block deal because it would reduce DBS content providers to U.S. homes to only one. Said Legg Mason analyst Blair Levin: “We are skeptical the DoJ or FCC would be able to craft a workable remedy [approving merger] that retains the benefits that a competitive marketplace would have on pricing, programming and service quality.” Even if combination were blocked by govt., Levin said, EchoStar “is in an excellent position to benefit… by having a weaker competitor during the period of government review” and it “likely wouldn’t be significantly harmed by a government rejection.” GM is taking “an extraordinary gamble” because DirectTV services “are likely to continue to deteriorate during the merger review process [with] a major risk that the government will turn down the bid,” he said.

“A merged company would have 17 million-plus subscribers and would be larger than any cable company,” NCTA spokesman said: “It’s difficult to predict how antitrust authorities will view a combination of the 2 largest satellite companies.” Speaking on condition of anonymity, cable industry official predicted Hughes and DirecTV would “try to run this as an anticable exercise” and make cable industry out to be “boogeyman.” Asked if industry leaders were worried, official acknowledged satellite was “a formidable competitor” but said industry executives believed that, in long run, they had better vehicle to deliver multichannel video, voice, data.

FCC officials declined to comment. Speaking at FCC forum on ownership policies and competition, Mark Cooper of Consumer Federation of America predicted merger would be approved in spite of fact that rural subscribers would be left without choices. However, Bruce Owen of Economists Inc. said deal could better serve rural communities because merged company would have to offer those customers same deals as in cities where competition was fierce. NAB Pres. Edward Fritts said EchoStar-Hughes merger would “create the world’s largest monopoly video delivery system” and regulators should review proposal with “a high level of scrutiny.”

Deal received mixed reviews from Hill leaders. House Commerce Committee Chmn. Tauzin (R-La.) was briefed by GM Pres. Rick Wagoner Sun., and was scheduled to meet today (Tues.) with DirecTV founder Eddie Hartenstein and EchoStar’s Ergen to discuss acquisition, Tauzin spokesman Ken Johnson said: “We certainly will be taking a look at it from a competitive perspective. Obviously our big concern is the impact of having just one satellite company providing multichannel programming. The question we have to answer is how do we define competition in today’s evolving marketplace?” Johnson said Tauzin and committee would assess importance of competition within satellite industry and between satellite and cable industries. He said decision would rest on whether to “leave consumers with better choices or more choices,” decision that also would take into account future of broadband deployment.

Committee member Rep. Boucher (D-Va.) expressed support for merger, which he said was “best way” to fulfill potential of that satellite industry segment. He predicted regulatory agencies responsible for reviewing transaction would “recognize the procompetitive synergies and public interest benefits that attend this acquisition.” Boucher also said more markets would receive local-into-local service as result of transaction: “By combining the DirecTV assets with EchoStar’s satellite operations, the merger will produce a stronger multichannel video programming distributor that can compete more vigorously with cable companies and accelerate the delivery of broadband services to rural markets. The combination will enable a rationalization of satellite capacity, which will facilitate the uplink of more local TV stations across the nation.”

House Telecom Subcommittee ranking Democrat Markey (Mass.) agreed with Boucher’s contention that transaction could end “duplicativeness” in use of satellite frequencies and could provide extra space that could be used for local- into-local signals, staffer said. However, there’s no guarantee that new entity would commit space for local-into- local purposes, aide said, and Markey also remained skeptical of assertions that deal would be easily approved by antitrust regulators. Markey suggested that transaction be placed under “utmost scrutiny that any regulator can give,” staffer said.

Senate Commerce Committee Chmn. Hollings (D-S.C.) said he was “troubled” by prospect of 2 of largest satellite providers’ becoming one company: “That kind of consolidation would leave consumers with few if any choices. Our committee will continue to look into this and other consolidation matters.” Aide to ranking committee Republican McCain (Ariz.) said McCain was “looking at it,” but had no further comment. Communications Subcommittee ranking Republican Burns (Mont.) hadn’t yet issued statement, but staffer said he would comment on situation by Tues. morning. Senate Judiciary Antitrust Subcommittee leaders hadn’t commented by our Mon. deadline. Senate staffer said problems with Senate phone system Mon. afternoon were preventing some members from communicating with media on issue.

Murdoch said he was “surprised GM did not share his vision and enthusiasm” for “one-of-a-kind” global company. He said choice of EchoStar “means there will be no choice” for DBS consumers in U.S. Foreign satellite analyst said EchoStar-Hughes merger was “going to leave News Corp. with no obvious entry into the U.S. market. It’s a big blow.”

Some analysts believed transaction could help Northpoint in its efforts to provide broadband services to rural areas. “This merger caps a long history of anticompetitive conduct by the satellite industry and demonstrates their failure to provide competitive choices for rural Americans,” Northpoint CEO Sophia Collier said. FCC “couldn’t have foreseen that the free spectrum” it gave to DBS industry “would come to be controlled by a single monopolist,” she said.