Pegasus Buys Golden Sky for $1 Billion

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In a deal valued at $1 billion, Pegasus Communications
Corp. announced plans last week to acquire fellow DirecTV Inc. programming reseller Golden
Sky Holdings Inc.

Pegasus agreed to give Golden Sky shareholders 6.5 million
shares of its class-A common stock, valued early last week at $632 million, and it will
assume Golden Sky's approximately $373 million in debt and liabilities.

Pegasus and Golden Sky are the two largest direct-broadcast
satellite affiliates of the National Rural Telecommunications Cooperative, which struck a
deal with DirecTV in the early 1990s for exclusive rights to sell DirecTV in certain rural
territories. Between the two companies, Pegasus and Golden Sky serve roughly 1.1 million
of the 1.4 million NRTC DBS subscribers.

A spokesman for the NRTC said last week that its board of
directors must approve the Pegasus deal, as it does all contract transfers.

Over the past several years, both Pegasus and Golden Sky
have aggressively gone after smaller NRTC territory-holders. The Golden Sky acquisition
last week had been widely anticipated.

The Pegasus announcement "was not a surprise at
all," said Lehman Brothers Inc. analyst Bob Berzins, who applauded the deal. "It
gives the company that much more mass, that much more credibility."

Pegasus chairman Mark Pagon suggested that he and Golden
Sky chairman Rodney Weary had talked about a possible deal for more than one year, but
Golden Sky's announcement last fall that it would initiate an initial public offering
delayed the negotiations. The IPO never happened.

Pagon suggested last week that Pegasus would continue
consolidating the remaining NRTC territory-holders.

"I don't see any change in our appetite," he
said. "If anything, this may accelerate the process. Small members may see it as a
good time to get out."

Pagon said Pegasus has more access to the capital needed to
help grow its DBS business than smaller players do.

According to Berzins, the Golden Sky acquisition helps to
position Pegasus for the long term, and it also makes the company an attractive takeover
target should DirecTV attempt to buy it. "Larger companies [like DirecTV] are not
necessarily good at assembling smaller companies," he added.

Pagon denied that his company's acquisitions were
merely an attempt to dress up Pegasus for a takeover. "We're positioning
ourselves for the long term," he said. "This really positions us to be one of
two major players in this area of the world."

Pegasus outsells DBS competitor EchoStar Communications
Corp.'s Dish Network systems more than two to one in Pegasus markets, Pagon said.

But like other NRTC affiliates selling DirecTV,
Pegasus' long-term DBS plans are hindered by uncertainties over the NRTC's
contract with DirecTV, which is set to expire within a few years.

As the contract stands now, DirecTV does not allow NRTC
affiliates to sell all of its programming beamed from the core service at 101 degrees west
longitude, with exceptions including Home Box Office feeds.

The NRTC took DirecTV to court over the matter last summer.
And last week, Pegasus and Golden Sky filed a class-action suit to protect their
companies' individual interests in the matter.

"I don't think we're plowing new
ground" with the class-action suit, Pagon said. "We wanted to make sure all of
the procedural bases were covered."

Berzins predicted that the lawsuit would not go to court,
and that it would be resolved either through a settlement or with DirecTV buying Pegasus.

DBS is a fundamental part of Pegasus' business going
forward. The company exited the cable-television business altogether last week, selling
its Puerto Rico cable system to Centennial de Puerto Rico, a unit of Centennial Cellular
Corp., for $170 million in cash. Pegasus still operates 10 broadcast stations in the
United States.

Pagon said Pegasus would use the funds from the
cable-system sale to aggressively market digital-satellite services. "We're
committed to providing satellite-delivered service," he added, "and cable is
perceived to be a distraction to that mission."

In addition to DirecTV programming, Pegasus plans to
introduce interactive services over satellite to both the TV and the PC sometime later
this year.

Last week Pegasus announced that it had made a controlling
investment in Personalized Media Communications LLC, a technology company that owns
licenses for satellite-delivery functionality such as local insertions.

"We consider their intellectual property as key to the
future," Pagon said, adding that the technology will allow Pegasus to customize
programming for individual viewers.

Pegasus' share price was up nearly 10 percent last
Tuesday following the various news reports, closing at $106.63. But the stock dropped more
than 11 percent Wednesday, followed by a modest rise Thursday morning.

The company said last Wednesday that it is offering $175
million in convertible preferred stock in a private offering to qualified institutional
buyers.

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