EchoStar Communications Corp. received word from General Motors Corp. that it was "willing to establish a dialogue" to discuss the legal and financial implications of a possible merger between EchoStar and GM's Hughes Electronics Corp., EchoStar said last Thursday in a Securities filing.
GM spokeswoman Toni Simonetti would not comment on such talks. "We're in negotiations with News Corp.," Simonetti said. "We would certainly fulfill any obligation to shareholders to consider viable alternative proposals," she added.
In recent weeks, some Hughes shareholders have placed increased pressure on GM to consider multiple bids for Hughes and its DirecTV Inc. division in order to secure a premium price for the company.
Last Monday, EchoStar announced plans to raise $1 billion through a bond offering, leading to speculation that the company was building a war chest to attempt a run for its direct-broadcast satellite competitor. The company already has cash reserves of about $1.5 billion and reached the cash-flow positive milestone for the first time last quarter.
"You don't go out and raise $1 billion just for a goof," said S.G. Cowen analyst Rob Kaimowitz. He believes the bond offering is just one piece of a multiple-step plan to make a bid for DirecTV.
Industry observers said EchoStar chairman Charlie Ergen has nothing to lose and plenty to gain by throwing a wrench into News' chairman Rupert Murdoch's proposal to merge his SkyGlobal Networks division with Hughes.
One source speculated that even if Ergen doesn't walk away with DirecTV, he might be able to negotiate a settlement with Murdoch to share nationwide DBS spectrum, thus allowing each of the DBS players to offer more local channels. The two might even be able to come to an agreement about shared retail distribution — and thus lower subscriber acquisition costs for each — but such talks could face antitrust scrutiny.
Last year, EchoStar filed suit against DirecTV on antitrust grounds, claiming its competitor was forcing its retailers to carry DirecTV exclusively or not at all. Sources close to DirecTV said GM was unlikely to take merger talks with EchoStar seriously while the lawsuit was still pending.
Ergen probably would need additional cash to satisfy GM. Reports have speculated that GM wants $5 million or more in cash before it spins off Hughes to a buyer. Simonetti would not confirm the reports and said GM has never made such a figure public.
An EchoStar/DirecTV combination would be so powerful that Ergen would be able to raise a lot of capital, Lehman Brothers analyst Bob Berzins said.
One source said that GM might be reluctant to wait for the necessary regulatory approval that would be needed for such a merger, preferring to get its cash sooner rather than later.
But sources believe EchoStar could be prepared to make programming rate concessions, especially in rural markets, if it means getting Justice Department approval.
"The synergies between the two companies would be so large that the company would bend over backwards to assure approval by Washington," Berzins said.
While not disputing the power of a combined DBS company, Banc of America Securities analyst Douglas Shapiro wrote in a report last Thursday that such a merger could actually disrupt the DBS industry and make it less competitive to cable.
The move to a common technological platform would take a long time to complete and thus could distract DBS from new subscriber growth goals, Shapiro wrote.
"In an environment where cable's continued roll-out of digital and high-speed data are rapidly altering the competitive dynamic, even a year of disruption to DBS momentum could have a long-term adverse impact on the business," said the report.
Shapiro's firm also believes Ergen is the more rational leader for DirecTV from a shareholder perspective than Murdoch. "Ergen is ultimately a rational manager who wants to maximize the profitability of the DBS business," the report said.
