EchoStar Communications Corp. might be stinging from rejection by the Federal Communications Commission, but it hasn't given up hope on winning regulatory approval of its merger with DirecTV Inc. parent Hughes Electronics Corp.
Last week, the company was working on a merger-restructuring proposal that it hopes can meet with Justice Department approval. EchoStar said it will meet with DOJ officials Oct. 28 to go over the plan.
The FCC voted unanimously to scuttle the $26.8 billion merger as anti-competitive on Oct. 10, but gave the companies 30 days to propose modifications. EchoStar hopes it can persuade the agency to embrace a revamped deal that would gain the support of Justice's antitrust officials.
According to informed sources, EchoStar has no plans to yield one of the three orbital slots that allow its satellite fleet to blanket the continental United States with video programming and high-speed-data services.
Forfeiting a so-called full-CONUS slot is not an option for at least two reasons: It would eliminate capacity intended for merger-related efficiencies; and would involve a multiyear effort to migrate millions of subscribers from the slot that had to be abandoned.
Nor are the Baby Bell phone companies expected to step into the picture as national resellers providing non-facilities-based competition, sources said.
As of late last week, the only option in play was a deal with Cablevision Systems Corp., which covets EchoStar's frequencies at 61.5 west longitude — an orbital slot that covers all the lower 48 states, except Washington, Oregon, nearly all of California and parts of Nevada and Idaho.
Those that give the merger little chance of getting past the FCC — no matter how extensive the overhaul — pointed to the tone and substance of FCC chairman Michael Powell's statement announcing that the merger would be referred to an administrative law judge.
"The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly," Powell declared. "I decline the invitation to turn our national communications policy back so many years."
Yet those that believe FCC approval is not impossible pointed to a statement from FCC member Kevin Martin, who said he was willing to entertain a revised merger whose outlines resembled the Cablevision proposal.
"Failing to fully explore such options could be a missed opportunity to bring more competitive choices to consumers," Martin said.
Dialogue under way
Sources last week indicated that for the first time, EchoStar and Cablevision opened a dialogue in an attempt to hammer out a deal.
Plugging gaps in the West could be resolved by the two companies, or through separate action. The FCC, for instance, has at least one unassigned orbital slot that covers the entire western half of the continental U.S.
When the FCC rejected the EchoStar-DirecTV merger, agency officials cited numerous anti-competitive harms.
As a result, FCC sources indicated at that time — and again last week — that approval of an overhauled merger proposal, even one that included Cablevision, was highly unlikely.
Sources indicated that the FCC would have trouble because the Bethpage, N.Y.-based MSO's financial condition is suspect, and because it would be entering a rapidly maturing satellite market, with 17 million subscribers under the control of EchoStar or DirecTV.
Cablevision's supporters counter that the company is committed to selling assets to generate the cash needed to back the satellite venture, and is seeking one or more partners to help reduce the financial burden.
Under a proposal advanced by Cablevision in July, EchoStar would ensure that the 17 frequencies it effectively controls at 61.5 would be transferred to Cablevision's venture, which already controls 11 of the 32 frequencies available at the 61.5 location.
Cablevision is scheduled to launch a state-of-the art, Lockheed Martin Corp.-built satellite next March and initiate service in December, under a timetable set by the FCC.
Using just the 11 frequencies it currently controls, Cablevision told the FCC it could serve 143 local markets, including 76 of the top 100 locales. With EchoStar's 17 frequencies, Cablevision could add up to 85 national HDTV channels and come close to serving nearly all 210 local-TV markets.
Some sources indicated that EchoStar was scurrying around Washington and exhausting all of its options to postpone an inevitable defeat — at which time the company would owe Hughes a $600 million break-up fee. Some have speculated that the break-up fee might be litigated.
Jimmy Schaeffler, a DBS analyst at The Carmel Group, said there was "a slim chance" the Justice Department would accept the merger based on potential competition from Cablevision. But Cablevision chairman Charles Dolan and EchoStar chairman Charlie Ergen should never be underestimated, he added.
"You're betting not only on something new but also on a new industry subsector, HDTV," said Schaeffler. "Both are pretty darn iffy."