News Corp. chairman Rupert Murdoch last week moved one step closer to his long-held dream of adding a U.S. presence to his worldwide direct-broadcast satellite business, when General Motors Corp. officially gave the nod to further talks to merge its Hughes Electronics Corp. division with News' Sky Global Networks Inc.
Meanwhile, EchoStar Communications Corp. — the parent of rival platform Dish Network — reported strong growth, renewing speculation that it might insert itself into the sweepstakes for Hughes' DirecTV Inc.
GM's board of directors gave the green light to negotiate terms for a deal proposed one week earlier by Murdoch in Detroit. In a press release issued last Tuesday, the automaker said there were no assurances the two parties would ultimately reach accord on a deal, and that any transaction would be subject to shareholder and regulatory approval.
But News was clearly pleased by the public acknowledgement of the ongoing talks, which only last month were considered hopelessly stalled.
"We're delighted with this development," spokesman Andrew Butcher said. "It's exactly what we wanted."
According to published reports, Murdoch sweetened his earlier bid by offering to reduce his company's stake in the combined Sky Global entity from 35 to 30 percent, although Murdoch would still maintain operational control. News Corp. is also expected to withdraw certain assets from the Sky Global mix, such as the money-losing Italian television venture Stream.
Microsoft Corp. is said to be willing to pony up $3 billion to $4 billion for a stake in the combined company, and Liberty Media Group is willing to kick in about $500 million. Some sources speculated that General Electric Co. might also contribute.
Unlike an earlier Murdoch bid for Hughes and its DirecTV Inc. subsidiary that was leaked to the press several months ago, news of the latest proposal met with at least modest shareholder approval. Hughes shares closed up more than 4 percent last Wednesday, following GM's late-Tuesday press release. A day later, the stock dipped again slightly.
Analysts said part of the dip could be attributed to EchoStar's earnings report last Thursday morning. The company came out ahead of Wall Street expectations, in terms of both financials and subscriber acquisitions.
Its stock was rewarded with a 14.3-percent jump in its price per share by the close of trading on Thursday.
Morgan Stanley analyst Vijay Jayant, who had recently named EchoStar his top stock pick, was pleasantly surprised by the company's earnings.
"They meaningfully beat our expectations by 20 to 30 percent in subscriber acquisitions," he said.
EchoStar signed 460,000 net new Dish Network subscribers in the first quarter, outpacing DirecTV's net additions by more than 100,000. EchoStar also reported its first cash-flow positive quarter, as well as higher revenues and lower operating losses.
Many industry observers expect EchoStar chairman Charlie Ergen to be a spoiler in Murdoch's play for DirecTV, and Ergen did little to downplay such speculation during an earnings call last Thursday.
Asked if he could come up with a bid that would satisfy both GM and Hughes shareholders, Ergen replied, "EchoStar is capable of making an offer." But he couldn't predict whether the companies would find it acceptable.
A spokeswoman for EchoStar would not comment on whether Ergen plans to make a formal bid for Hughes.
"Historically, EchoStar has taken a role in every transaction that's gone on in the DBS industry," said SG Cowen Securities Corp. analyst Rob Kaimowitz. The investment firm issued a report last Tuesday stating that EchoStar was poised to enter the battle for Hughes.
Mickey Alpert, president of Washington, D.C.-based Alpert & Associates, also believes Ergen will enter the game, given his propensity to gamble.
"Even if he doesn't get it [Hughes], at least he raises the price," Alpert said. Doing so would not only put the combined Sky Global at a financial disadvantage, but could raise EchoStar's stock value among investors in the DBS sector.
Industry observers said last week that Ergen would have no trouble finding an investment firm willing to help him raise the cash needed to finance a Hughes takeover.
The bigger challenge may be in winning the government's blessing for a DirecTV-EchoStar combination. Though the DBS companies contend that their primary competition is the cable industry, and not one another, that's a harder argument to make with respect to rural markets.
Before it could merge with DirecTV, some predict that EchoStar would need to negotiate a consent decree with the U.S. Department of Justice promising to keep rural DBS programming prices in line with rates charged in the more-competitive suburbs.
Proponents of a merged DBS entity predict that by combining their nationwide satellite spectrum, DirecTV and EchoStar could offer local programming in more markets, thus making the industry better able to compete against cable.
"It's a marriage made in heaven from a strategic and financial standpoint," said Alpert.
Ergen told analysts last week that there was no real way to know ahead of time whether the government would okay a DirecTV-EchoStar merger, and that the companies would face certain risks in waiting for such regulatory approval.
"You'd have to be pretty confident" a deal would be approved before announcing a merger, Ergen said. "It's not something you would take a 50-50 shot at."
Some financial analysts last week said they still favored a DirecTV-EchoStar merger over a News Corp. bid for Hughes.
One reason is that the value of the proposed Sky Global venture is hard to evaluate, partly because no one is quite sure which of its assets News Corp. will ultimately contribute to its new Sky Global spin-off. The company held back on a planned initial public offering for the division, in part because of poor market conditions.
If a merger with Hughes does go through, Sky Global would not go forward with its IPO, but would fold its assets into the publicly traded Hughes, perhaps changing its stock-ticker symbol, one source said.
Sources do not expect a formal decision on a Hughes-Sky Global merger to be announced before June.