Direct-broadcast satellite market-leader DirecTV Inc.
raised its subscriber base to more than 7 million -- rivaling all but the top two cable
MSOs -- when it closed its $1.3 billion deal to buy PrimeStar Inc.'s medium-power
satellite assets last Wednesday.
DirecTV paid with a mixture of cash and stock. PrimeStar
said it will change its name to Phoenixstar Inc.
Unhappy with an earlier tender offer that was 33 percent
below the bonds' and other debt's $742.5 million face value, PrimeStar
bondholders had threatened to thwart the deal with DirecTV, which required PrimeStar to
buy back most of the bonds.
Sources close to the bondholders said PrimeStar's
later, better offer was formally accepted last Wednesday morning, only two days before
DirecTV's April 30 walk-away date. A group representing 84 percent of
PrimeStar's bonds approved the deal.
PrimeStar agreed to pay 85.6 cents on the dollar in cash
for the bonds, plus a one-year option on any appreciation in DirecTV parent Hughes
Electronics Corp.'s stock above $47 per share.
By last Thursday, Hughes' stock -- a tracking stock of
Hughes' parent, General Motors Corp. -- was selling for $53.56 per share.
EchoStar Communications Corp. chairman Charlie Ergen
reportedly purchased a hefty number of PrimeStar bonds on the open market this past
winter, which probably helped the bondholders' cause. He wasn't part of the
group that negotiated directly with PrimeStar, though.
"Thanks to him not tendering, we got more cash,"
a bondholder source said.
DirecTV still needs Federal Communications Commission
approval to close a separate transaction to buy Tempo Satellite Inc.'s 11 high-power
DBS frequencies at 119 degrees west longitude.
Analysts called this the more important part of the deal
because it would allow DirecTV to offer local broadcast channels in limited markets.
But securing PrimeStar's nearly 2.3 million-customer
base was no small victory for DirecTV, which watched as rival EchoStar poached tens of
thousands of PrimeStar customers with offers of free equipment and dealer incentives.
Now that DirecTV owns the remaining PrimeStar subscribers,
it can market to them directly with on-air messages. DirecTV hopes to convert as many as
possible to its high-power DBS platform over about a two-year period before turning off
PrimeStar's medium-power signal.
DirecTV also negotiated with PrimeStar's former
master-agent network to help install DirecTV dishes and receivers in converted PrimeStar
The pace of conversions will depend on a number of factors,
including equipment supply and installer availability, DirecTV president Eddy Hartenstein
"We'll take advantage of all of the efficiencies
that we can," Hartenstein said, adding that when DirecTV rolls a truck to convert one
PrimeStar system, it will look for others in the neighborhood at the same time.
Overall market demand among new DirecTV subscribers will
also affect the pace of conversions. "In the heavy fourth quarter, it will be all
hands on deck for installing new subscribers, because you don't want to keep those
customers waiting," Hartenstein added.
But other issues remained unsettled last week, including
how National Rural Telecommunications Cooperative members such as Pegasus Communications
Corp. would convert subscribers to DirecTV.
DirecTV currently collects programming revenues from
customers who are still on the PrimeStar medium-power platform. But once they're
converted to DirecTV's high-power platform, DirecTV must share a portion of those
revenues with the NRTC for former PrimeStar subscribers that live in rural NRTC
DirecTV is reportedly negotiating with the NRTC to help pay
for the PrimeStar buyout and for DirecTV's merger with U.S. Satellite Broadcasting,
which is expected to close late this month.
In return, NRTC members could gain a revenue split from the
premium services that USSB currently sells, and maybe a cut of new services that DirecTV
launches from satellites at 110 and 119 degrees.
NRTC agreements currently apply only to DirecTV's
programming at 101 degrees.