Hughes Electronics Corp. and EchoStar Communications Corp., the nation's top two home satellite television providers, terminated their year-old merger plan yesterday, officially ending a deal that federal regulators had essentially killed over the past two months.
The decision cleared the way for other suitors -- chief among them Rupert Murdoch's News Corp. -- to bid for Hughes's satellite assets.
As a condition of the termination, EchoStar yesterday paid Hughes a $600 million breakup fee. But the company balked at buying Hughes's 81 percent stake in the PanAmSat satellite fleet -- valued around $2.3 billion -- which had been part of the merger agreement, sources said. Instead of instigating costly and lengthy litigation to force EchoStar to buy PanAmSat, Hughes agreed to keep it. EchoStar also keeps the $3.7 billion the company raised to buy Hughes.
In October 2001, EchoStar chief executive Charles W. Ergen proposed to take over Hughes's DirecTV satellite business in a deal initially valued around $26 billion and lately worth around $20 billion because of lower stock prices. Ergen said combining the 7.5 million customers of his Dish Network with DirecTV's 11 million subscribers would provide local channels and high-speed Internet across the United States and pose effective competition to cable, keeping rates down.
The Federal Communications Commission rejected the merger in October, saying it would create a monopoly that would cause "staggering" costs to consumers. Last month, the Justice Department concurred and sued to block the merger on antitrust grounds.
EchoStar attempted a last-minute deal to transfer some of its satellite capacity to Cablevision Systems Corp. to create in Cablevision a viable competitor to a merged EchoStar and Hughes. The Justice Department and the FCC were unmoved.
The timing of yesterday's announcement was a surprise to the industry, which did not expect it until after the first of the year; the merger agreement had a Jan. 21, 2003, walk-away date. But both companies realized it was fruitless to continue pushing for a deal that had no advocates in government, each said.
"Obviously, we are disappointed in the final outcome," Ergen said in a prepared statement. "However, EchoStar will continue to seek alternative, innovative ways to provide competition to the rapidly consolidating cable industry and to provide more choices for all consumers."
General Motors Corp., which owns 30 percent of Hughes's DirecTV, is eager to dump the satellite company, which no longer fits with the automaker's strategy. Its sale could pay for other company priorities, such as bolstering GM's pension fund.
EchoStar shares rose $2.04, to $21.09, yesterday. Hughes fell 25 cents, to $11.05, and GM rose 78 cents, to $35.95.
"We worked as hard we could to get it done, but we had to face the fact that we had stiff resistance from the regulatory agencies and so now we are happy to be able to put $600 million in cash in the bank and proceed to pursue new opportunities," said George H. Jamison, Hughes's vice president for corporate communications.
Murdoch made an offer for DirecTV, but Hughes rejected it in favor of EchoStar's proposal. Though News Corp. has not commented on the EchoStar-Hughes merger, it has lobbied actively against it, enlisting a wide variety of constituencies, including religious broadcasters and the broadcasting lobby.
Murdoch is likely to make a move on DirecTV early next year but will bid only on GM's 30 percent stake, he told analysts during News Corp.'s quarterly call on Nov. 5. If a deal were struck, it would probably be a straight-up acquisition of Hughes stock and not a merger of Hughes and News Corp. assets, a source said.
The FCC has indicated that a News Corp. purchase of DirecTV would not raise the same sort of monopoly concerns as the EchoStar deal had because News Corp. does not own U.S. satellites. Murdoch does, however, own a global satellite system and wants U.S. control of satellite distribution for his Fox television network and 20th Century Fox films.