DirecTV parent Hughes Electronics Corp. said Thursday it
will sell its satellite manufacturing assets to The Boeing Co. for $3.75 billion in cash.
Analysts praised the deal, saying it would bring Hughes
closer to becoming a pure-play services company.
Hughes also said it will change its corporate structure to
focus on its two core service markets -- consumers and business-to-business.
Eddy Hartenstein, currently president of DirecTV Inc., was
promoted to corporate senior executive vice president of the Hughes Consumer Sector. In
his new role, Hartenstein will oversee DirecTV's operations in the U.S., Latin
America and Japan. He will also be responsible for marketing Hughes' broadband
products: DirecPC, which delivers high-speed data via satellite with a telephone return
path, and Spaceway, a two-way broadband satellite service set to launch in 2002.
In a conference call with reporters last week, Hughes
chairman Michael Smith said the company would name a new DirecTV president to succeed
Hartenstein. Smith did not say whether that search would extend beyond DirecTV and Hughes.
Hartenstein will maintain an office at DirecTV headquarters
along with his new one at Hughes corporate headquarters down the road in El Segundo,
Calif., DirecTV spokesman Bob Marsocci said.
It's unclear if Hartenstein, who took DirecTV from
start-up to its position as the third largest U.S. multichannel-video provider in less
than a decade, will continue to be DirecTV's main voice with Wall Street and the
press.
"Eddy embodies DirecTV," Marsocci said. "He
is DirecTV."
Hughes Electronics (GMH) stock rose Thursday following
reports of a pending deal, which were confirmed just after the stock market closed
Thursday. On Friday morning, the stock opened at $116, up roughly 5 percent from the
previous day's close.
PaineWebber Inc. raised its 12-month target on Hughes stock
to $140 per share, according to first vice president of research Thomas Eagan.
"It's great news," Bear Stearns & Co.
Inc. analyst Vijay Jayant said last week. "They received very good value for their
manufacturing assets -- higher than the Street had valued those assets."
Wall Street is pleased by Hughes' move away from the
relatively low-margin satellite manufacturing business to its higher-margin -- and sexier
-- services end, Jayant said.
Moving out of manufacturing will also help appease
investors who had shied away from Hughes because of the possibility that anomalies in the
satellites it built could hurt the bottom line.
Some had viewed close access to a manufacturing sibling as
a strength for both DirecTV and Hughes Network Systems' DirecPC. But Smith said
Hughes handpicked Boeing to buy its satellite-manufacturing assets because it was
comfortable that Boeing could help grow its business. Hughes did not auction off the
assets.
The asset sale will provide funding to grow the
company's DirecTV and DirecPC businesses and to develop new services, including the
Spaceway project.
In a partnership announced last year, Hughes will launch
two new America Online Inc.-branded services this year, AOL TV for DirecTV subscribers and
AOL Plus Via DirecPC.
Smith said recently announced merger between AOL and Time
Warner is "a great deal" with upside for Hughes as it rolls out its AOL-branded
products later this year.
The Time Warner deal also "answers huge questions
about content" for AOL TV, Hartenstein said. There's no question of demand from
retailers for the new product, given their reaction earlier this month at the Consumer
Electronics Show in Las Vegas, he added.
DirecTV would be the first to market with AOL TV,
Hartenstein said. Even with Time Warner Cable certain to carry AOL TV once its systems are
upgraded DirecTV has an advantage in being a nationwide service, he added.
"DBS companies have taken the lead in delivering new
services, and that's been good for the industry," said Alpert & Associates
president Mickey Alpert.
Alpert said Hughes' recent restructuring makes the
company a more attractive takeover target.
"A telephone company or a cable company will buy
either DirecTV or EchoStar [Communications Corp.]," but not necessarily this year,
Alpert predicted. "It is the inevitable march toward the Internet economy."
Smith declined to speculate on possible merger plans for
Hughes.
Hartenstein predicted 7 million DirecTV products would be
sold in the U.S. this year, but not all of them will count towards net new subscribers. A
percentage of those sales will replace customer churn, more will help complete the
conversion of PrimeStar by DirecTV customers to high-power equipment, and some will be to
new or existing customers who want multiple receivers in the home. New services such as
high-definition television, AOL TV, Wink and TiVo will also help to move boxes.
Smith and Hartenstein declined to give specific DirecTV
subscriber goals for 2000, but Smith admitted reaching the 10 million customer mark by the
end of the year was "a worthy goal."
Hughes also plans to add 1.2 million to 1.5 million DirecPC
customers in the next three years, Smith said. When the AOL Plus Via DirecPC product is
ready to ship in April, the company plans to spend $500,000 to promote DirecPC --
"something we haven't done before," Smith said.
When Hughes releases its fourth-quarter 1999 financial
results this week, DirecTV is expected to report $3.4 billion in revenues for the year.
