ECHOSTAR CONCESSIONS UNCLEAR

“Ballgame” for EchoStar takeover of DirecTV “basically comes down to revising the deal in such a way that it’s acceptable” to FCC and to parties, one analyst said after Commission turned down deal (CED Oct 11 p1). But industry officials were doubtful that realistically was possible. Companies weren’t speaking publicly about plans, EchoStar spokesman saying they would be revealed in meeting with Justice Dept. Oct. 28.

EchoStar has 30 days to fix problems in its merger application or deal effectively is dead. Decision by administrative law judge, which is established in FCC decision, could take 9 months, well after deadline imposed by companies to close deal. Boards of 2 companies could extend date, but attorney familiar with proceedings said: “Most people won’t go through that kind of trouble to get a merger approved. They just give up.”

Last week, EchoStar started floating proposals and indicated for first time that it was willing to give up some spectrum, to allow use of some satellites as backups and to help new competitors enter market. “The trick is to give up enough capacity to allow for a viable competitor and still keep the value of the deal intact so it doesn’t hurt the business,” Legg Mason analyst David Kaut said. Cablevision, Pegasus and SES are candidates to use spectrum, industry sources said. Of 3, Pegasus has 1.4 million subscriber base and experience in running business, but may not have financial means to purchase spectrum, industry official said.

“I don’t believe Charlie [Ergen, EchoStar chmn.] is saying he lost,” Lehman Bros. analyst William Kidd said: “He’s still trying to make the deal work, no matter how [challenging] that may seem.” SG Cowan analyst Thomas Watts said of Ergen: “It was brilliant of him to try. It kept DirecTV out of the hands of [rival] News Corp.” Commerce Capital Markets said: “The FCC has signaled an understanding that some consolidation in the telecom market is inevitable. The action by the FCC is not inconsistent with that signal because the merger in question was such an extreme case.”

Most analysts expect News Corp. to renew bid, but at considerably lower price. GM is asking $4 billion for its stake in Hughes to pay for pension fund, sources said. However, deal with News Corp. could tie up DirecTV for another year while regulators reviewed transaction, analysts said. GM probably would be better off spinning DirecTV off and borrowing money against company, selling stock to public and trading Hughes shares, one analyst said. Transfers would be tax-free and wouldn’t require regulatory approval.

GM would have to pay EchoStar $600 million if it started talks with another company before Jan. 21. Conversely, EchoStar must pay GM $600 million if deal isn’t completed by deadline. Breakup fee is roughly size of EchoStar current debt, analyst said. EchoStar deal also is different because most termination fees are limited to cases where one party backs out, not when regulators fail to approve transaction, analyst said. “In those cases, no fees are usually charged.” Clause was placed in contract because Hughes and GM knew there could be antitrust problems with transaction, analyst said.

Few experts believe Ergen will pay all of breakup fee, or even $2.9 billion asking price for PanAmSat. PanAmSat has been experiencing trouble in Latin America market despite glowing 3rd- quarter profits. Ergen has said there are certain circumstances under which his company could avoid breakup fee, including if it were proved that Hughes hadn’t done everything it could to facilitate approval of transaction. “It’s a fair assumption” that EchoStar and Hughes will “go their separate ways” if deal isn’t approved by deadline, Hughes official said. Litigation is likely in future, analyst Robert Peck said.

Reaction to decision continued to come in from industry and Hill. “While the proposed merger had pluses and minuses, it is clear that it would fundamentally altered competition” in DBS industry, Sens. Kohl (D-Wis.) and DeWine (R-O.), chmn. of Antitrust Subcommittee, said in joint statement. “Consumers would have paid the price” if deal had been approved, Kohl said. Sen. Burns (R-Mont.) called FCC decision “well reasoned and the result of a sustained effort” and “a tremendously positive development” for rural America. American Cable Assn. Pres. Matthew Polka said small independent cable operators “will truly have a chance to flourish in smaller markets and rural areas” as result of decision.

Fallout from deal may cost Wall St., which could lose $100 million in potential advisory fees, analysts said. Dealogic said merger fees were 3rd largest after Comcast-AT&T ($221 million) and AOL-Time Warner ($135 million). However, undetermined amount of fees may have been paid already, Dealogic said.