Bad News Hits Pegasus

2/08/2004 7:00 PM Eastern

Share values in Pegasus Communications Corp. plunged last Friday, the day after DirecTV Inc. chairman Chase Carey quashed any hopes of a deal to buy the DirecTV reseller.

DirecTV broke off mediation discussions with Pegasus concerning the latter's suit regarding its rights to resell DirecTV service. Pegasus sued the DBS provider in 1999, claiming DirecTV was attempting to accelerate the termination of those rights, set to expire in 2008.

DirecTV also has a pending $60 million lawsuit against Pegasus for breach of contract. Court-ordered mediation talks began in January of 2003.

The decision to terminate those discussions came after a meeting with Pegasus founder and chairman Marshall Pagon in New York City on Feb. 5.

"We believe that Pegasus has an unrealistic view of its contractual position and, therefore, of its resulting business prospects and fundamental valuation," Carey said in a statement. "With every day that passes, both Pegasus's significance to DirecTV and its value as a standalone enterprise diminish."

Carey nixed a Pegasus buyout.

"Although we would like to market our services across our entire national footprint, DirecTV has demonstrated an ability to aggressively grow our subscriber base without and, quite frankly, despite Pegasus," Carey said in the statement. "At or anywhere near current trading levels for Pegasus, we believe our capital is better deployed growing our subscriber base in high-growth markets rather than overpaying for the declining Pegasus subscriber base."

Pegasus released preliminary fourth-quarter results last week, disclosing it lost 45,000 subscribers in the period.

For the year, it lost a net 299,000 subscribers, ending the period with about 1.2 million customers in mostly rural areas.

In a statement, Pagon said the meeting with Carey in New York was not part of the mediation process.

Pagon said that after the 90-minute meeting, which focused on general business discussions, he received a cell phone call from Carey stating DirecTV was terminating the mediation process.

Pagon said the DirecTV press release "bears no relationship whatsoever to the matters discussed by Mr. Carey and me this morning (Feb. 5). I can only conclude that DirecTV is seeking to intentionally damage the value of our equity and debt securities and thereby interfere with the successful completion of our recently announced financing. Indeed, it would appear from their press release that DirecTV's larger purpose is to seek to acquire our DirecTV business at a substantial discount to the value that our bondholders and preferred equity holders are legally entitled to."

On Feb. 4 Pegasus announced a $100 million bond deal that would finance an earlier tender offer for bonds valued at the same amount.

Pegasus shareholders began selling. In early trading on Feb. 6, more than 1 million shares traded hands.

The stock was priced at $27.55 at 10:06 a.m. on Feb. 6, down $14.10, or 34%.

Among those who suffered losses in the price decline were Pagon and Peninsula Investment Partners, a Charlottesville, Va.-based hedge fund that had been accumulating a big position in Pegasus over the past few months.

Since November, Peninsula has purchased about 1.4 million shares of Pegasus — about 29% of its outstanding stock — at prices ranging from $19.17 to $49.65 per share.

Reports filed with the Securities and Exchange Commission during that period indicate Peninsula Investment was the second-largest single shareholder, behind Pagon's 1.47 million shares.

Peninsula's intentions during its buying spree were unclear, although several members of the financial community speculated that it was betting on a DirecTV purchase — at a hefty premium.

Peninsula managing director R. Ted Weschler did not return phone calls seeking comment.

Volatility Reigns
Share prices for Pegasus Communications have had big swings the last two months
December 5, 2003 18.75
*As of 11:46 a.m. trading Source: NASDAQ Web site
December 19, 200320.20
January 6, 200428.51
January 21, 200450.15
February 4, 200442.73
February 6, 200427.09*

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