In a stock and cash transaction valued at $1.3 billion,
Hughes Electronics Corp. last week announced that it will buy the assets of U.S. Satellite
Broadcasting and fold them into its DirecTV Inc. unit.
The deal should close within three to six months, pending
government and USSB shareholder approval.
DirecTV and USSB launched the Digital Satellite System in
1994, sharing spectrum at the 101 degrees west longitude orbital location. Analysts have
long questioned why customers should sign up for programming from both companies and
receive two bills each month.
The two-player platform also weakened the brand positioning
for both companies, which shared the DSS brand until DirecTV recently relinquished it in a
trademark dispute.
DirecTV president Eddy Hartenstein said last week that the
deal will strengthen the company's competitive position against cable by simplifying
the sales offer at retail and in advertising.
By acquiring the rights for the premium services and
special events that USSB had carried, DirecTV will add revenues of $12 to $12.50 per
subscriber, per month, Hartenstein predicted, bringing average monthly revenue per
subscriber to between $57 and $58. The incremental revenue translates into $800 million to
$900 million in the first year.
And by consolidating redundant operations, such as call
centers and uplink facilities, DirecTV expects to save $160 million to $180 million per
year.
The additional revenues and cost savings are expected to
speed DirecTV's breakeven point to the second quarter of 1999.
Industry analysts expressed little surprise at the deal.
"It was just a matter of time," said Jimmy Schaeffler, CEO of The Carmel Group.
While most industry players said the deal made strong
business sense, many had mixed feelings over USSB -- and the Hubbard family, which built
the company -- leaving the direct-broadcast satellite landscape.
"The Hubbards did what was in the best interest of the
consumer and the shareholder," said Vinnie Bauer, senior vice president of
direct-to-home for Home Box Office.
"The Hubbards are extraordinary people," said
Gene Falk, vice president and general manager of DTH business for Showtime Networks Inc.
"They've been visionaries in the face of people who said, 'This is never
going to work.'"
Stanley E. Hubbard, president and CEO of USSB, chairs the
Satellite Broadcasting & Communications Association. Hubbard said he would stay active
within the SBCA "as long as the members and the staff would like me to be."
Hubbard's brother, Robert, is an executive vice
president at USSB. Their father, Stanley S. Hubbard, is chairman. The Hubbards are not
expected to work for DirecTV once the transition is complete, although all three will have
seats on a new DirecTV executive-advisory board.
The Hubbards and a handful of other employees have signed
four-year noncompete clauses with Hughes.
The decision to sell USSB "was very emotional,"
Hubbard said.
USSB negotiated generous compensation packages for its
employees. Hubbard explained the news to employees at the company's Minneapolis
headquarters last Monday.
DirecTV executives also met with USSB staff last Wednesday
to address some of their concerns, according to a spokeswoman for USSB, who added that
employees are still "very energized" and "focused on keeping the momentum
going."
Once the deal closes, DirecTV will evaluate which of
USSB's 185 employees it will bring over to its headquarters in El Segundo, Calif.
"We're growing, and we'll need certain people in certain jobs,"
Hartenstein said.
Some USSB employees that don't move to DirecTV may
find jobs with Hubbard Broadcasting Inc. That company plans to develop its own
programming, which it will offer to DirecTV "for a good-faith review," Hubbard
said.
DirecTV plans to expand its own programming offering with a
new Spanish-language service from the three transponders that USSB owns at 110 degrees
west. Hartenstein said DirecTV will offer 15 to 20 Hispanic channels.
Customers for the Hispanic service would need new 18-inch
dishes and receivers to access programming from both the 101 and 110 orbital locations.
Hartenstein said he doesn't expect the company to have to switch out much hardware,
because the Hispanic subscribers will mostly be new customers.
Pending an FCC license transfer to DirecTV, the company
plans to relocate its DBS-1 satellite to 110 after a successful launch of its replacement
satellite at 101.
A clause in the contract allows DirecTV to back out of the
deal with USSB if the DBS-1 satellite fails before the deal with USSB closes.
At closing, USSB shareholders can opt to trade their shares
for cash or General Motors Corp. class H (GMH) common stock (GM is Hughes' parent
company). The Hubbards are expected to remain major shareholders in GMH stock, as is Bob
Torray, chairman of Robert E. Torray & Co. Inc., a major USSB shareholder with more
than 8 million shares.
Analysts speculated that the merger between DirecTV and
USSB won't be the last DBS consolidation.
Mickey Alpert, president of Washington, D.C.-based Alpert
& Associates, predicted that DirecTV might make a play for DBS resellers Pegasus
Communications Corp. and Golden Sky Systems. He also said he thinks that either DirecTV or
EchoStar Communications Corp. will ultimately go after PrimeStar Inc. -- both for its
subscriber base and its unused high-power DBS spectrum at 119 degrees west.
In the transaction with USSB, DirecTV gains only 200,000
incremental subscribers. Most of USSB's 2 million subscribers also take DirecTV. In
mid-December, DirecTV served more than 4.3 million customers.
Hartenstein said that although USSB's premium
penetration was better than cable's, DirecTV hopes to improve upon that by creating
new bundled packages.
