News

SBC-DirecTV Talks Stir Interest

2/16/2003 7:00 PM Eastern

News that SBC Communications Corp. was talking with Hughes Electronics Corp. about a possible deal for DirecTV Inc. stirred the financial markets last week and might have cheered some cable types who'd rather not see Rupert Murdoch own a leading competitor.

Certainly the news didn't seem to please News Corp.'s Murdoch, who's in no mood to compete over control of the top direct-broadcast satellite provider — again.

But given the phone companies' on-again, off-again flirtations with the multichannel video business, most observers seemed to be treating the transaction as something they'd deal with when and if something happens.

Sources familiar with the companies confirmed SBC had some meetings and discussions with General Motors Corp.-controlled Hughes, DirecTV's parent, but stressed they were in the very preliminary stages.

A Feb. 7 report in The New York Times
about the talks helped boost Hughes's tracking stock, at least for a while. It rose about 5 percent on Feb. 10, to $10.20, but receded to $9.71 on Feb. 13.

Wall Streeters generally panned the move, at least for SBC. A potential asking price for Hughes — upwards of $10 billion — would be substantially dilutive to SBC, regardless of its strategic value.

SBC's share price declined 2.7 percent (68 cents), to a $24.50 close, on Feb. 10. It ended Feb. 13 at $22.45, down another 8.4 percent ($2.05).

DirecTV has been on the block since the federal government killed its merger with No. 2 DBS provider EchoStar Communications Corp. over anti-competitive concerns in December. Since then, the only serious bidder to emerge for the satellite giant has been Murdoch, who lost out to EchoStar after prolonged negotiations last year.

SBC could help jack up the price Murdoch might pay for DirecTV, but it was unclear how serious SBC ultimately would be, given investors' poor reception.

News Corp., meanwhile, tried to reassure investors it wouldn't overpay.

In a conference call with analysts to discuss fourth-quarter results, News president Peter Chernin declared: "We will not be drawn into a bidding war."

Before this apparent interest in DirecTV, SBC's track record in multichannel video had generally been expensive and abortive.

In the 1990s, SBC was aggressive, buying Hauser Communications Inc.'s suburban Washington, D.C., systems in 1993 for $650 million. It later sold them.

SBC — then called Southwestern Bell — also attempted a $4.9 billion joint venture with Cox Communications Inc. in 1993, but that flamed out when cable regulation was stiffened.

SBC's buyout of Pacific Telesis Inc. in 1996 brought cable operations in San Jose and San Diego, Calif. And a 1999 acquisition of Ameritech Corp. brought in the Americast cable overbuild.

SBC shut down PacTel's cable systems and sold the Americast systems to WideOpenWest LLC in 2001 for less than $300 million.

Some observers see synergies in providing high-speed data via satellite, but then DirecTV abandoned its digital-subscriber-line service arrangements with several telcos, including SBC, earlier this year.

DirecTV spokesman Bob Marsocci confirmed the company let its earlier resale agreements with SBC and other Bells expire and said DirecTV never broke out how many subscribers it gained as a result of those agreements.

He said DirecTV wouldn't comment on the possibility of talks with SBC.

"GM has stated it has several options concerning its ownership stake in Hughes and is in the process of evaluating those options," Marsocci said.

SBC does have a resale agreement with EchoStar, but is not promoting it heavily, apparently because satellite-resale economics favor the DBS provider.

EchoStar does not break out subscriber numbers regarding its telco agreements and had no comment on the SBC talks with DirecTV.

"Presumably one of the reasons is that the resale economics provide little incentive for SBC to push the product," Banc of America Securities cable analyst Doug Shapiro added in a report. "But will owning it outright solve this? Maybe, maybe not."

Shapiro also opined a possible pairing of SBC and DirecTV could be mixed news for cable.

"While the specter of the [Bells] entering video is a perennial bear case, relative to News Corp., SBC may be the lesser of two evils," Shapiro wrote. "SBC has never proved itself a viable video competitor. We don't think it will be able to materially improve DBS economics and we believe cable would retain a significant economic advantage over an RBOC (regional Bell operating company)/DBS bundle."

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