LEAVING GM'S ORBIT?

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General Motors Corp. faces growing pressure to spin off Hughes Electronics Corp., rather than to merge its DirecTV Inc. direct-broadcast satellite assets with News Corp.

Wall Street analysts, large institutional Hughes shareholders and Hughes chairman Michael Smith have asked GM to spin the satellite subsidiary off to better increase the value of the subsidiary's stock, which has dropped significantly in recent weeks.

Some analysts have advised that after a spinoff, Hughes should try to construct a deal that would merge DirecTV with competing DBS service EchoStar Communications Corp.

But even after a spinoff, a merger with EchoStar could face lengthy and considerable government hurdles-even more than a Hughes merger with News Corp., industry observers said.

Last Thursday, Smith told analysts at a Morgan Stanley Dean Witter conference in New York that GM had asked him to explore options for a leveraged deal to separate Hughes from the automaker.

Analysts said Hughes would talk to 13 companies that had previously expressed interest in making strategic investments in Hughes to see if they would pony up the cash that GM seeks from restructuring the subsidiary's ownership.

A Hughes spinoff could also bring in cash if the satellite subsidiary sells its stakes in PanAmSat Corp. and Hughes Network Systems, and if GM sells off a large percentage of its shares in Hughes.

One source suggested that Hughes and GM stock prices would rise as soon as the car maker announced plans for a spinoff, and that failure to announce any restructuring deal at all could put GM's financial rating in jeopardy of a Wall Street downgrade.

In a statement released last week at the advice of its attorneys, GM made public its long-stated intentions to evaluate various restructuring options relating to its interest in Hughes.

"Whether and when we might be able to announce a transaction remains uncertain, although it is a very high priority to attain resolution of the matter as promptly as practical," GM president and CEO Rick Wagoner said in the release, issued late last Thursday.

In his statement, Wagoner acknowledged that the possible transactions include a spinoff with or without a related merger, "as well as the alternative of maintaining the status quo."

GM has never publicly acknowledged its talks with News Corp. chairman Rupert Murdoch, who has requested a private meeting with the automaker's board. In the past, News has said it has held separate talks with the Hughes and GM camps about a possible deal to merge DirecTV with News' SkyGlobal satellite assets.

In the Morgan Stanley conference address, which was later Webcast at www.hughes.com, Smith disputed speculation that he was holding up merger talks with News Corp. for personal reasons related to long-term job security. He called the premise "absolutely false and untrue-it is absurd."

But Smith made clear that he does not favor a News deal as the offer now stands.

"GM will not take an asset that is unparalleled in the industry and give it away," Smith told analysts.

News Corp. spokesman Andrew Butcher said late last Thursday that the companies continue to negotiate, "but progress is slow."

Though Smith told analysts that he's not necessarily comfortable with the level of debt a leveraged spinoff would require, he is convinced such a deal can be fashioned.

According to a report issued by Morgan Stanley analyst Vijay Jayant last Thursday, Smith conceded Wednesday night that a Hughes merger with EchoStar would offer the greatest synergy of any potential transaction.

DBS insiders have said the companies could significantly save costs by reducing duplicative operations such as uplink facilities and customer call centers. And by merging both companies' full-CONUS (continental U.S.) satellite spectrum, a combined DBS entity could offer a significantly greater number of channels, including high-definition television and additional local broadcast stations.

ANTITRUST ISSUES

"We are pleasantly surprised that Hughes was willing to consider the possibility of a combination with EchoStar," Jayant wrote in his report. "Based on the legal counsel it has received, it believes that the probability of a merger with EchoStar getting approved by the government is less than 50 percent."

A DirecTV-EchoStar merger could raise antitrust problems because it would eliminate a national multichannel video-programming distributor and reduce consumer choice, analysts said.

"If Ergen buys DirecTV, a consumer who today has three choices for multichannel video suddenly has two. Three going to two is not good," said Blair Levin, a media analyst with Legg Mason Wood Walker Inc. and a former FCC chief of staff under chairman Reed Hundt. "That's an antitrust problem."

Merger proponents would likely argue that neither DirecTV nor EchoStar is vertically integrated with programmers, which reduces the risk of discrimination against unaffiliated program suppliers. A combined firm would also have about 15 million subscribers, or about 18 percent of the pay-TV market. That's about 1 million fewer wholly owned subscribers than the No. 1 cable operator, AT&T Broadband.

James Olson, an antitrust lawyer at Howry, Arnold and White, predicted that antitrust officials concerned that the deal would leave just one DBS company to compete against cable would examine the potential for both DBS and cable to raise their rates.

He also noted that many rural consumers do not have access to cable service-only to satellite providers-and that antitrust reviewers would focus on whether the merger would harm that class of consumers. Olson headed the FCC's competition division under Hundt.

Antitrust enforcers typically analyze a merger with reference to the overall product market. The deal would encounter more trouble if the agency defines the product market solely as the DBS industry. It would become less problematic if the product market were to include the entire pay TV universe, with cable factored into the analysis.

"It's harder to make some sort of antitrust case against it, because cable still has the dominant share of that market," said Paul Glenchur, a cable analyst with Schwab Washington Research. "The question is whether the antitrust authorities wold take the DBS market and isolate it in some way."

Some on Wall Street were rooting for the News deal to work out in the end.

"The comments that came out [last week] about Hughes, that could be posturing for them to get a better price," said Moody's Investors Service vice president and senior credit officer Neil Begley. "I still think that [GM's] best option in terms of shedding Hughes is News Corp.

"Even though News has said it is talking to EchoStar, it doesn't make as much sense for them to do a deal with EchoStar. I think [News'] target is really Hughes. They're both trying to show they have some leverage, when in fact neither of them have very much leverage."

Mike Farrell contributed to this story.

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