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DirecTV to Sell Half of Hughes Network Systems to SkyTerra

By Michael S. Rosenwald
Washington Post Staff Writer
Tuesday, December 7, 2004; Page E01

Rupert Murdoch's DirecTV Group Inc. will sell half its stake in Hughes Network Systems Inc. to a company controlled by a New York private-equity firm, the companies said yesterday.

The deal with the affiliate of Apollo Management LP reflects Apollo's drive to buy satellite holdings even as DirecTV works to reduce its holdings in businesses unrelated to its television satellite network.

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SkyTerra Communications Inc., the Apollo affiliate, is paying $50 million plus 300,000 shares of its stock for half of Hughes Network Systems, which provides satellite communications for business transactions such as credit card payments at gas stations and department stores. It also provides Internet service by satellite to customers in rural areas.

Hughes, which has 1,500 employees at its headquarters in Germantown, will be managed by SkyTerra, which operates a number of satellite and telecommunications companies. The companies said the deal is expected to close in the first half of 2005.

Some jobs may be cut in Germantown, "but at what level it's premature to discuss at this point," said Bob Marsocci, vice president of communications for DirecTV, whose chairman is Murdoch.

Apollo was founded by financier Leon Black and has holdings in chemical, furniture and real estate companies. It is one of several private equity firms that have entered the satellite business. It's the largest shareholder in Sirius Satellite Radio Inc. And it is part of a group of firms that agreed to a $5 billion purchase of Intelsat Ltd., a commercial satellite operator.

Jeffrey A. Leddy, SkyTerra's chief executive, said DirecTV had originally offered to sell all of Hughes Network Systems but later asked to retain a 50 percent stake. Leddy said his company is interested in buying the rest should it become available.

DirecTV's strategy surprised Todd Mitchell, an analyst who covers the company for Blaylock & Partners LP. "It really puzzles me as to why they only sold half," said Mitchell, who doesn't own any DirecTV shares. "I would have liked to have seen them sell the entire business."

He noted that DirecTV executives have indicated they are seeking to focus solely on the company's satellite television service. The company previously sold PanAmSat Corp., which operates a fleet of satellites, as well as its holdings in XM Satellite Radio and a business manufacturing set-top boxes for TVs. Hughes Network Systems was the last major piece to sell off.

"We still think there are opportunities in that business, and we remain optimistic about the potential upside," Marsocci said.

Under the deal, SkyTerra will not get control of Hughes's two new next-generation satellites, which are scheduled for launch next year, but it will get rights to a third satellite that is under construction.

To complete the deal, the parties set up a new limited liability company, which received $375 million in debt financing from undisclosed lenders.

When the deal is closed, DirecTV said it will receive $200 million in cash from that $375 million, as well as the cash and stock from SkyTerra. Hughes said it will take a fourth-quarter pretax charge of about $200 million related to the deal.

Shares of DirecTV closed yesterday at $15.74, up 9 cents, on the New York Stock Exchange. SkyTerra closed at $18.60, up $2.25, in over-the-counter trading.

© 2004 The Washington Post Company