Oddsmaking DBS Analysts Can't Agree2/17/2002 7:00 PM Eastern
Even as outside attorneys for Hughes Electronics Corp. and EchoStar Communications Corp. tried last week to put a positive spin on the companies' merger prospects, direct-broadcast satellite analysts said the merger is anything but a done deal.
Faith in the proposed merger seems to be slipping among some analysts, who place the odds that the deal will be approved at less than 50 percent.
Others place the odds much higher, but only if EchoStar chairman Charlie Ergen can agree to concessions that the U.S. Department of Justice may seek before it agrees to a consent decree.
No one is quite sure what those concessions will look like, because the DOJ typically does not tip its hand, and attorneys for the DBS companies have said they don't want to negotiate in the press.
Last Monday, Hughes' lead outside antitrust attorney predicted the proposed merger would receive regulatory approval within three to five months. Peter Standish, a senior partner at the law firm of Weil, Gotshal & Manges, gave his view of the antitrust proceedings during a conference call hosted by Morgan Stanley satellite analyst Vijay Jayant.
In a report last Tuesday, Jayant was somewhat less optimistic than Standish.
'50-50 AT BEST'
"The call left us slightly more positive on the merger regarding prospects for the deal, but we continue to believe it is still too early to call and place the odds of successful completion at 50-50 at best," Jayant wrote in the report. He added that "low-key efforts by Hughes and EchoStar" over the next six to eight months could make the difference in the approval process.
"This is a significant review, as people expected it would be. I just didn't know it was going to be this popular," Standish said last week, referring to the level of opposition the merger has received both in public government filings and in the press.
"It's unbelievable how much misinformation is out there," SG Cowen satellite analyst Rob Kaimowitz said, adding that most of the opposition comes from parties with vested interests in the deal. The odds were 70 percent to 80 percent that the deal would ultimately receive government approval, Kaimowitz said.
The good news for the merger, Standish said, is that historically, the Justice Department's antitrust division has been "fairly immune" to political pressures with respect to merger reviews.
When asked what the DBS companies would not be willing to give up for the merger, Standish replied that lawyers don't like to negotiate consent decrees in public. But he did say that giving up any of the DBS orbital slots "would wreak tremendous havoc on the synergies of this transaction."
Analysts last week said they thought it was unlikely that Ergen would agree to give up spectrum at any of the three full-continental United States (CONUS) slots, although they speculated that he may be willing to relinquish other, partial-CONUS spectrum to see the deal through.
"In the realm of horse trading, anything is possible, but it throws the logic for the merger out the window," Tellus Ventures Associates president Steve Blum said when asked about the likelihood that Ergen would relinquish any full-CONUS spectrum as part of the merger talks.
The odds that the merger will be approved are 80 to 90 percent, Blum said, "but the question is, how much is the system going to be able to extract in order to make the deal go through?"
The Carmel Group analyst Sean Badding said Ergen's cause has been hurt by failing to win over the National Association of Broadcasters, "one of the most powerful lobbyists on Capitol Hill."
'TIDES' AGAINST ERGEN
Badding estimated the probability that the merger would go through at 20 percent to 25 percent, down from the 45 percent odds he would have given it three to six months ago.
"The tides have turned against Charlie [Ergen]," Badding said.
Kaimowitz speculated that EchoStar might need to find a way to bring local channels to all rural markets, not just the top 100 DMAs. Even though delivering local channels in every market would be expensive, "it may be the cost of merging," Kaimowitz said.
There's too much opposition to the merger for the deal to be approved as proposed, said Alpert & Associates president Mickey Alpert, "but a lot can be addressed with a creative consent decree." Alpert placed the odds of the deal going through at slightly higher than 50-50, but added, "It is by no means a sure thing."
To help address the issue of rural market competition, the merging DBS companies may need to work out some settlement with Pegasus Communications Corp. so Pegasus can become a stronger competitor, Alpert suggested.
The fate of Pegasus and the other National Rural Telecommunications Cooperative territory owners is one of the biggest wild cards surrounding the merger. The NRTC has a contract through 2007 that guarantees its members the exclusive rights to sell DirecTV programming sent from certain transponders at 101 degrees within their territories.
But EchoStar has said that following the merger, it plans to market a competing DBS service under the Dish Network brand within NRTC territories. The Dish Network service could be sent from transponders at 110 and 119 degrees.
If EchoStar and Pegasus don't come to a meeting of the minds through either a new contract or a buyout of Pegasus' subscriber base, the transition period for DBS-spectrum consolidation could be pushed back to 2007, Blum suggested.