Pegasus: No Merger Soon?

2/01/2004 7:00 PM Eastern

Pegasus Communications Corp. began a tender offer for about $100 million of senior notes due 2005 and 2007, a move that foreshadows another possible debt offering but decreases the likelihood of a Pegasus-DirecTV Inc. merger in the near future.

Pegasus, which resells DirecTV's direct-broadcast satellite service, said on Jan. 26 that it would purchase the bonds for cash — between $960 and $1,000 per $1,000 principal amount.

Bondholders must surrender their securities by 5 p.m. on Feb. 6. Those that tender before that date will receive an additional early-participation premium of $30 per $1,000 of the principal amount of the notes.

Banc of America Securities is serving as the exclusive dealer manager for the offering.

In a research note, UBS Warburg cable and satellite debt and equity analyst Aryeh Bourkoff said the tender offer likely means another bond offering is forthcoming. According to Bourkoff's report, Pegasus has about $60.7 million in cash on hand and its next scheduled bond maturity is its $80.6 million 9.625% senior notes, due in 2005. Also in 2005, about $96.3 million in bank debt is scheduled to amortize.

Pegasus has stated that it could sell its broadcast-television stations — which Bourkoff values at about $100 million — to pay off the bank debt that matures in 2005. Pegasus currently owns or programs 11 television stations in Pennsylvania, Maine, Tennessee, Florida and Georgia.

Bourkoff wrote that the tender offer is a good deal for bondholders, but was disappointed because the offering likely means Pegasus and DirecTV won't merge anytime soon.

"Ultimately, we continue to believe a combination of DirecTV and Pegasus makes sense, but we do not believe that the company would pursue a bond refinancing at current rates if it were close to finalizing negotiations with DirecTV," Bourkoff wrote.

However, Bourkoff noted that the incentive to tender the bonds before Feb. 6 could be telling. That is four days before Hughes Electronics Corp. — DirecTV's parent — is scheduled to conduct its fourth-quarter conference call.

"The ultimate success of the tender offer may depend on the commentary made on the Hughes conference call, in our view," Bourkoff wrote.

Pegasus shares, after rising as high as $50 each (up $2.48 per share) in early trading on Jan. 27, fell back to $47.40 per share (down $1.62 each) at 4 p.m. on Jan. 28.

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