Dish Shenanigans


Just what is Charlie up to? That's the question on a lot of minds after a report surfaced last week that EchoStar Communications Corp. chairman Charlie Ergen — one of the few remaining mavericks in the direct-broadcast satellite industry — was said to be in preliminary talks with News Corp. and Liberty Media Corp. to sell the company he founded in 1980.

Last Tuesday, a report in The Wall Street Journal
said that Ergen, frustrated after the failure of his proposed merger with Hughes Electronics Corp.'s DirecTV Inc. last year, was looking to sell out. The Journal
article stressed that talks were in their preliminary stages and that no discussions about price or ownership structure were made.

Several analysts who cover the DBS and cable sector doubted Ergen's sincerity, claming his apparent willingness to sell out may be a ploy to delay efforts by News Corp. and to acquire DirecTV.

In a research report, UBS Warburg cable and satellite analyst Aryeh Bourkoff said that although EchoStar and its Dish Network platform is an attractive asset, the price may be too high.

"We believe that such discussions are more likely indicative of a tactic to delay the a potential DirecTV merger with News Corp. and Liberty, rather than indicative of Ergen's willingness to precipitate a sale of all or part of EchoStar," Bourkoff wrote in a report.

Banc of America Securities analyst Doug Shapiro also chimed in.

"One important issue to us: Mr. Ergen is a strong-willed entrepreneur, and our guess is that it would be necessary for him to leave the company after selling it," Shapiro wrote. "Whether he would be willing to do this is unclear.

"And there's an even more fundamental question: Is Mr. Ergen's motivation for holding these talks really to sell the company or is he primarily motivated to disrupt a potential sale of Hughes?"

Vague response

The answers to those questions are apparently known only to Ergen, and he is being characteristically cryptic.

In a statement, EchoStar said it "continues to focus its efforts on maintaining its leadership position in the cable and satellite industry. Obviously our board of directors would be required to consider any firm proposal that would benefit our shareholders."

Fueling speculation that Ergen is trying to serve as spoiler to DirecTV is the fact that News and Liberty can effectively gain control of the No. 1 DBS service provider for as little as $4 billion by buying out General Motors Corp.'s 33 percent interest in the company. EchoStar, with a market capitalization of $12.4 billion and debt of $5.7 billion would likely cost a prospective suitor upwards of $20 billion.

Then there's the history between News Corp. chairman Rupert Murdoch and Ergen.

In 1997 — worried about angering the cable operators that distribute his programming services — Murdoch bailed out of a deal to merge News Corp.'s nascent ASkyB U.S. satellite operations with EchoStar, opting to instead invest $1 billion in the cable-backed PrimeStar Inc. satellite-TV venture.

Federal regulators blocked the PrimeStar deal, and Ergen filed a $5 billion breach-of-contract suit against News. A humbled Murdoch settled up.

News and partner MCI WorldCom traded their American satellite operations — including the rights to a valuable orbital slot — for $1 billion in EchoStar stock.

More recently, Murdoch and News Corp. launched a major behind-the-scenes lobbying effort to block EchoStar's proposed purchase of Hughes,

DirecTV's parent. That effort was successful in that federal regulators blocked the deal in November and the two parties agreed to dissolve the merger proposal in December.

Investors also didn't seem to be buying the notion that Ergen would sell out, driving EchoStar's stock down 4.3 percent, or $1.12 per share, in the days after the story broke.

Other industry observers said the leaks may be a ploy on News Corp.'s part to speed up a deal with DirecTV.

Pressing GM

Although both News and Liberty have said they are in talks with General Motors about DirecTV, some observers believe the deal is dragging on. Earlier this month, GM CEO Rick Wagoner said the automaker hopes to decide what to do with the DBS company in 30 to 60 days.

"An article like that [in the Journal] could put pressure on GM stock," said the source familiar with the companies.

And indeed it did. Hughes stock fell 6.6 percent between Jan. 17 and Jan. 22, or 76 cents per share to $10.77 each. But News Corp. lost ground as well, dipping 5 percent, or $1.41 per share to $27.07 each.

While Murdoch may indeed be able to get DirecTV cheaper, striking a deal for GM's 33 percent stake in DirecTV is not as easy as it might sound.

First, Hughes is a tracking stock not backed up by hard assets. That tracker would have to be converted into an asset-backed security before News or Liberty would buy it. GM would have to put the proposal to a vote by Hughes shareholders. GM would not be allowed to vote on the issue.

And according to Hughes' articles of incorporation, any material change to the company's structure would require GM to pay Hughes' shareholders a 20 percent premium on their stock in GM shares.

"The concept of News Corp. and Liberty just waltzing in is overly simplistic," Shapiro said in an interview.

Another wrinkle is that GM believes the Hughes tracker is substantially undervalued.

"Why would they sell it at a 20 or 30 percent premium for cash if they believe the stock doubles in 18 months?" Shapiro said.