News

PrimeStar Seeks $300M to Buy Out Cable Owners

9/13/1998 8:00 PM Eastern

PrimeStar Inc. officials made pitches to potential
investors last week, seeking $300 million in private financing as part of a plan by News
Corp. and United Video Satellite Group Inc. to buy out the satellite provider's cable
MSO owners.

Meanwhile, some insiders at Tele-Communications Inc., which
controls UVSG, were privately confident that Department of Justice consent to
PrimeStar's plans was imminent -- possibly coming as soon as this week. Officials at
News Corp., UVSG and other involved companies would not comment.

One executive close to the deal said some DOJ action is
expected soon. That move could be to request some changes in the deal, the executive
cautioned, saying, "That's how consent decrees go. But I'd be very
surprised if they didn't issue a consent decree."

If so, that could give PrimeStar CEO Carl Vogel some good
news to announce during his appearance at the SkyForum conference in New York today (Sept.
14). Many cable executives will be in New York this week, too, for the Walter Kaitz
Foundation Fund-Raising dinner Sept. 16.

But another executive at a company close to the deal said
predicting DOJ approval this week seemed overly optimistic.

The DOJ had sued to block PrimeStar's $1.1 billion
merger with News Corp.'s American Sky Broadcasting Inc. (ASkyB), which included
authority to beam television programming to smaller dishes than the ones that PrimeStar
subscribers currently use.

The idea behind buying out the 61 percent of PrimeStar held
by Time Warner Entertainment, MediaOne Group, Comcast Corp. and Cox Communications Inc. is
to remove government objections to cable operators controlling one of the few licenses to
operate a nationwide high-power direct-broadcast satellite service.

Opponents, including other DBS providers, have argued that
TCI's controlling stake in UVSG was just as troublesome as the current MSO ownership.

PrimeStar's argument is that the situation will change
after TCI is sold to AT&T Corp., when the UVSG stake will be held by Liberty Media
Group, which will be controlled by current TCI chairman and CEO John C. Malone. But
Liberty will technically still be an AT&T subsidiary, and AT&T will own the
second-largest cable operator.

TCI has been confident of government approval of PrimeStar
high-power DBS deals in the past, only to see those deals shot down in Washington.

As published reports indicated last week, the four MSOs
appeared ready to sell their stakes to News Corp. and UVSG for $6 per share in cash, which
works out to about $700 million. The buyers also agreed to assume some debt attributed to
the MSOs.

Earlier, News Corp. and UVSG had offered about $8 per
share, but around $2 of that would have been in stock.

The MSOs had also been concerned about gaining access to
programming that Murdoch would put on PrimeStar -- just as Murdoch wants to be able to
carry exclusive programming that the MSOs are developing, such as local sports networks.
Assurances along those lines won't be worked out until after the deal goes through,
one executive familiar with the negotiations said.

PrimeStar executives were making the rounds in New York
last week, trying to raise $300 million by selling equity in the firm. Fund managers who
heard the pitch said that figure would work out to about 14 percent equity in PrimeStar.

Other sources said PrimeStar is also seeking strategic
investors, possibly including French pay TV giant Canal Plus.

In addition to bringing in cash, the presence of outside
investors not connected to UVSG or News Corp. might also help to get the deal approved in
Washington.

PrimeStar is also expected to try to raise cash through the
sale of high-yield bonds -- the fund managers said the company wanted to raise about $750
million through the bond sale.

Given current market conditions, some potential investors
worried about PrimeStar's ability to sell the junk bonds. Several high-yield
offerings by telecommunications providers like competitive local-exchange carriers --
which, like cable and satellite companies, generate cash flow, but no profits -- have been
shelved recently.

But the managers who heard the pitch said that wasn't
a big concern. "You've got [News Corp. chairman] Rupert Murdoch, you've got
Malone," one said. "It would get done."

The biggest hurdle for investors, the managers said, was
buying into the high-power DBS business -- especially one where DirecTv Inc. already has 4
million subscribers and fast-growing EchoStar Communications Corp. has 1.5 million.
PrimeStar has 2.1 million subscribers, but its growth has lagged behind that of its
competitors during the current turmoil.

To buy in, an investor almost has to assume that digital
cable won't effectively compete against DBS, and that the business will somehow
consolidate down to two players, one fund manager said.

The MSOs wanted more than $6 per share for their PrimeStar
investment, which Janco Partners Inc. analyst Ted Henderson estimated at $7.25 to $7.75
per share.

But Henderson pointed out that the MSOs already got about
$4 per share when the old PrimeStar Partners L.P. structure was rolled up into PrimeStar
Inc. in April. And PrimeStar has been a "dead investment" for them since the DOJ
sued to block the ASkyB merger.

"They've got bigger fish to fry at this point in
time," Henderson wrote in a report on the plan last week.

If PrimeStar can finally get moving on the high-power plan,
with an existing base of 2.1 million medium-power DBS subscribers and the planned addition
of 1.2 million C-band satellite subscribers from UVSG, it could "emerge as one of the
better investment stories in the second half of 1998 and the first half of 1999," he
wrote.

Leslie Ellis contributed to this story.

Want to read more stories like this?
Get our Free Newsletter Here!