Dire Straits for Dish?

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The vibe here last week was that EchoStar Communications Corp. CEO Charlie Ergen's $25.8 billion deal to buy DirecTV Inc. — and a near-monopoly over direct-broadcast satellite service — was in deep trouble, just a step away from entering the Justice Department's merger morgue.

Helping to feed that perception was a rally outside the Justice Department last Wednesday by an array of merger opponents.

A few dozen people — many of them the employees of groups fighting the deal — showed up for the sidewalk protest to chant "Dish The Merger," and lambaste the post-merger company as a monopolistic vulture in the making, whose talons are poised to claw local TV broadcasters, minorities, unions, the blind, small cable operators and rural Americans.

The protest occurred a day after USA Today
cited Legg Mason Equity Research telecom and media analyst Blair Levin as saying the Justice Department, which must approve the deal, was deposing satellite retailers, programmers and other merger foes in preparation for a court battle to stop the merger.

Levin issued a client memo one day later, reiterating his view that the Justice Department's Antitrust Division was more than likely to spike the deal. But he left room for the possibility for approval.

Over the years, the Justice Department hasn't been leak-prone regarding mergers. DOJ spokeswoman Dana Perino said she reviewed the USA Today
article and refused to comment on its accuracy.

"We did not put that story out," she said.

The merger also needs approval from the Federal Communications Commission. FCC sources said agency staff is conducting its review and no recommendations have been made to the FCC's four members.

The FCC has a self-imposed 180-day merger review deadline, which, barring any interruptions, is Nov. 2.

OPPONENTS ANGLING

By combining, No. 2 DBS provider EchoStar and Hughes Electronic Corp. — parent of No 1. provider DirecTV — would create a satellite giant, serving 16.4 million subscribers. A union would yield the second largest pay TV provider, behind the proposed AT&T Comcast Corp. with 22 million subscribers, also awaiting clearance from the FCC and DOJ.

The DBS deal, critics contend, would eliminate competition between the two companies and deny a second satellite option for millions of Americans not served by cable operators.

Ergen has countered that the merger makes more efficient use of DBS spectrum, allowing the company to provide local broadcast-TV signals in all 210 markets (up from about 50 markets today), offer 12 channels of high-definition TV and furnish high-speed Internet access to millions of homes on the wrong side of the broadband divide. Consumers that can't get cable will be protected by a national pricing plan, with consumer costs tied to rates in competitive markets.

"We remain confident that the merger will be approved," EchoStar spokesman Marc Lumpkin said last week.

Opponents of the deal also claim that removing one of the DBS firms from the market is unacceptable, because it would allow the resultant company to wield too much influence. Some opponents are motivated by past business encounters with Ergen.

National Association of Broadcasters executive vice president Jim May said EchoStar couldn't be trusted to carry local TV stations in a nondiscriminatory manner.

"I think the field is littered with EchoStar's broken commitments," May said at the rally. "Frankly, we trust the competitive marketplace over promises of a company seeking to gain a perfect monopoly."

NAB has corralled the support of Western state lawmakers to fight the deal.

"I cannot imagine a more clear-cut example of a violation of our competition laws. We need to end this merger process now," said Rep. Chris Cannon (R-Utah.).

Small cable operators fear that EchoStar-DirecTV would use its size and scale to obtain favorable programming rates. Matt Polka, president of the American Cable Association, said his membership of family-owned cable companies does not stand a chance in a scale-economy challenge with a combined EchoStar-DirecTV.

"It would result in the elimination of any competitor who would dare to stand in the way of the … satellite monopoly," Polka told the crowd. "We look forward to the day soon when this merger is stopped and we can get back to business for our customers and our communities."

CONDITIONAL APPROVAL

Carmel Group DBS analyst Jimmy Schaeffler said the whole thing might come down to whether Ergen can accept DOJ's conditions.

"An awful a lot depends on the nature of the conditions and EchoStar and DirecTV's response to those," Schaeffler said. "The bottom line: I think it is going to be tough to satisfy the government's requirements and still have a business."

DBS analyst Mickey Alpert, president of Alpert & Associates in Washington, said talk that the DOJ was going to kill the merger was premature. He insisted approval was likely once Justice officials and Ergen get down to some hard bargaining, which he said has yet to happen.

"There are a lot of people who have an interest in seeing that the merger doesn't go through, and those people are becoming very vocal," Alpert said. "What is clear is that the final cards have yet to be played or dealt."

Most Wall Street analysts, who had given a 40 percent to 60 percent chance that the merger would go through in the past, now are much less optimistic.

"The market is saying that there is a 10 percent chance at best for the deal going through," said one DBS analyst who asked not to be named. "You can see it in the spreads between the stocks."

With EchoStar out of the picture, the consensus is that News Corp. — which lost out to EchoStar in the bidding for DirecTV in 2001 — could swoop in and buy the DBS giant at a much lower price. News and EchoStar placed their bids for Hughes after parent General Motors Corp. opted to exit the DBS business.

But News has had its own problems, such as a sluggish advertising market and weakness at its Fox network. Adding to those difficulties are $5.8 billion in charges to its earnings News Corp. has had to take this year alone to reflect the decline in value of its 42 percent stake in Gemstar-TV Guide International Inc.

While that would seem to lessen the chance that News Corp. would re-enter the fray, at least some analysts believe News chairman Rupert Murdoch shouldn't be counted out just yet — especially since speculation has him joining forces with Liberty Media Corp. if he were to make a bid.

Liberty had been in on News Corp.'s original bid for DirecTV as a major investor in Sky Global Inc., the satellite holding company that was to house DirecTV and News Corp.'s European and Asian satellite assets. News Corp. scrapped plans for Sky Global shortly after it lost out on the DirecTV bid.

News Corp.'s original bid for DirecTV was in the low $20 per share range, a price that is about twice DirecTV's current market value.

"Even with a big premium [Murdoch] could bid half of that," said the DBS analyst who requested anonymity. "The question is how it would be structured. There is no more Sky Global, but I don't think there is anything that precludes News Corp. from making a bid."

Speculation is that Ergen would come out the winner even if the government blocks the merger, because he has been able to keep News Corp. at bay for at least a year — and has gained intimate knowledge of his No. 1 competitor. EchoStar has also managed to grow its customer base, while DirecTV's growth has slowed.

But the one problem with that theory, according to the DBS analyst, is that EchoStar agreed to pay GM a $600 million break-up fee to if the deal is scrapped because of regulatory issues.

Adding to the uncertainty is PanAmSat Corp., the satellite company EchoStar will be obligated to buy even if the DirecTV deal falls through. EchoStar had agreed to pay about $2.7 billion for PanAmSat, although there have been some indications that EchoStar may be trying to back out of the deal.

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