OPPOSITION LIKELY FOR DIRECTV DEAL, BUT APPROVAL IS EXPECTED

Washingtonians already are signaling that News Corp.’s purchase of DirecTV (CD April 10 p13) from General Motors won’t sail through completely unscathed, but most are predicting it eventually will be approved by both the FCC and the Justice Dept. Analysts said News Corp. had moved to head off at least one of the key issues with its program access guarantees, but questions still remain about the competitive impact of one company’s owning DBS, a major broadcast network, TV stations, a major movie studio and several hot cable networks.

The chmn. and ranking Democrat of the Senate Antitrust Subcommittee, for example, quickly issued a statement saying the takeover raised important competitive issues. Sens. DeWine (R-O.) and Kohl (D-Wis.) said they would hold a hearing on the deal, as it did on the proposed EchoStar takeover of Hughes Electronics and its subsidiary 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.”

House Commerce Committee Chmn. Tauzin (R-La.) will meet today (Fri.) with News Corp. Chmn. Rupert Murdoch to discuss his proposal to buy DirectTV, said spokesman Ken Johnson. “Given the size of the proposed deal, as well as the impact on the marketplace, [Tauzin] must talk to both Murdoch and Rick Wagner [GM CEO,]” he said. “Clearly the sale has the potential to create seismic shifts in broadcasting.” Johnson said Tauzin needed a thorough briefing on the proposal before any decision was made as to whether a hearing on the subject was warranted.

The Consumers Union (CU) also weighed in, saying the 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 the much larger number of its TV, cable and sports programming, rather than by cutting prices to compete for a smaller pool of DBS customers. He also said the deal came just as the 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, the partners are predicting the deal can receive regulatory approval and close by the end of the year. In fact, the deal terminates if it doesn’t close within 12 months, and News Corp. would receive a $300 million breakup fee under certain circumstances. GM, in turn, would receive a $150 million breakup fee if the deal didn’t close because News Corp.’s stock price dipped too much.

The govt. reviews could be completed within 6-12 months, Legg Mason said in its analysis of the deal. It predicted the merger approval “could involve some speed bumps” but “no brick walls.” Analysts there said the key issue could be the ability of competitors to get access to News Corp. programming after a merger, 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. The Justice Dept. in the past sometimes has required divestiture of some holdings to solve such problems. Some believe the role of Liberty Media and John Malone in News Corp. also is likely to become an 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.”

One concern is that the FCC doesn’t have specific rules on program access and media ownership, said Coudert Bros. analyst Timothy Logue. He said, for example, that DBS wasn’t really mentioned in the FCC’s proposed media ownership rule changes: “The question will be is there much legal ground for imposing barriers to exclusivity and on what basis will they ground those restrictions.” One possibility, he said, might be to require News Corp. to sign a formal agreement incorporating its commitments.

News Corp. also will argue that consumers would benefit from the DirecTV acquisition, its officials said. They said the 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 the impact of the transaction on both companies. Standard & Poor’s upgraded its Hughes rating to positive from developing, saying News Corp. “should provide operating and financial support” to DirecTV. It also said DirecTV was close to cash flow breakeven. Moody’s affirmed its rating for News Corp., based on the fact that a significant portion of the purchase price was in the 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 the long term from synergies with News Corp. and its other satellite interests.

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

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