Murdoch Lays Odds For Merger at 50-50
By MONICA HOGAN -- Multichannel News, 5/20/2001 8:00:00 PM
When News Corp. chairman Rupert Murdoch was prompted last week to place odds on whether his proposed deal to merge SkyGlobal Networks with DirecTV Inc. parent Hughes Electronics Corp. would ultimately be given the green light, a reluctant Murdoch told a CNBC reporter they were probably "50-50."
Some observers contend that Murdoch was merely erring on the cautious side, but others said those odds were dead-on.
Even as News proceeds with its due-diligence efforts, Hughes chairman Michael Smith has held talks in recent weeks with DirecTV's direct-broadcast satellite rival, EchoStar Communications Corp., about merging the two companies, sources said. Several industry observers said that an EchoStar bid was not only likely to materialize soon, but that it has just as much chance of succeeding as a SkyGlobal deal.
Hughes spokesman George Jameson would not comment on whether Smith was holding talks with EchoStar chairman Charlie Ergen.
EchoStar spokesman Marc Lumpkin also declined to comment, except to acknowledge past company statements that there would be "lots of synergies" in a DirecTV/EchoStar deal.
Although published reports speculate on the impact that a Murdoch-led DBS venture could have on the cable industry, MSOs would have more to fear from a DirecTV/EchoStar combination than a News/DirecTV deal, several observers said. Because they buy Fox cable, broadcast, sports and pay-per-view movie programming from Murdoch, cable operators would have at least some implicit hold over a News Corp. interest in any U.S. DBS operation.
Murdoch is widely believed to have left Ergen at the altar four years ago — when the two already had a deal to create a DBS powerhouse that was informally dubbed "DeathStar" by competitors — due to pressure from cable. At the time, Murdoch was still pushing carriage of the now successful Fox News Channel. After leaving Ergen, Murdoch joined the cable industry in an attempt to turn PrimeStar Inc. into a true, high-power DBS company.
Clashes over operational control of "DeathStar" also undoubtedly played into Murdoch's decision to leave the partnership with EchoStar. The hands-on Ergen was unwilling to turn his company over to Murdoch's management team.
Those same kinds of management disputes could also come into play in a DirecTV/EchoStar combination. Sources said that if Ergen finds funding for a successful run at DirecTV, he would almost certainly end up with operational control of the joint company.
However, if Murdoch won his bid for DirecTV, current DirecTV global chairman Eddy Hartenstein would remain as head of DirecTV, reporting to SkyGlobal CEO Chase Carey, sources said.
A combination of DirecTV and EchoStar — at least as the companies stand today — would not include a significant programming arm. The operational efficiencies, however, would allow the new DBS giant to virtually double its programming by combining its nationwide satellite bandwidth. That would also allow it to deliver broadband via satellite more efficiently.
And with control of more than 15 million households, a DBS combination would have more negotiating muscle when programmers come calling to pitch rate increases. Ergen hinted in a recent earnings call that he might drop some channels in the future, rather than pass on a prohibitively high rate increase to customers.
Ergen's attempts to position himself as the protector of the consumer could serve him well on the regulatory front. One source said Ergen has already promised concessions concerning rate caps if the DBS companies were allowed to merge.
While in recent weeks Murdoch has painted the government approval process as one of the biggest hurdles to a DirecTV/EchoStar merger, there are others.
One obstacle is the billions of dollars it could cost to switch out DBS receivers in the field if DirecTV and EchoStar were to go to a single technology platform. However, an upgrade would allow DirecTV boxes to be switched out for a more current compression technology and could help curtail some of its signal-theft problems. If the DBS industry were to consolidate in the future, it would be less expensive to start the transition to a new technology standard now, than to wait until millions of the current boxes were deployed.
PaineWebber analyst Tom Eagan said he believes Murdoch's odds of announcing a deal within the next few weeks are probably closer to 75-25 than 50-50. He also called an EchoStar play for DirecTV "a non-starter."
No other credible bids for DirecTV are likely to materialize, some believe.
"There are only two people who know how to run [DirecTV] better than it's being run now," said S.G. Cowen analyst Rob Kaimowitz, "and that's Rupert Murdoch and Charlie Ergen."
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