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EchoStar, Hughes Agree To Merger

New York – After months of negotiations with two suitors, directors of General Motors and its subsidiary Hughes Electronics agreed to spinoff Hughes and its DirecTV unit from GM and merge it with rival EchoStar.

Under the proposed deal, which must be approved by GMH stock holders and go through up to a year of federal regulatory scrutiny, EchoStar CEO Charlie Ergen will head the merged entity and control 18 percent of the stock. GMH/Hughes stockholders will retain 53 percent control of the operation, GM shareholders will control 11 percent and EchoStar’s public shareholders will have 18 percent.

Based on closing prices Friday, the stock and cash transaction was valued at approximately $25.8 billion. The deal offered Hughes shareholders a 20 percent premium, and Ergen pledged $2.75 billion of his own stock as collateral for the loan, after one bank dropped out of backing the venture. Deutsche Bank will back another $2.75 billion.

The decision came a day after News Corp. Chairman Rupert Murdoch, who had been negotiating against EchoStar for control of Hughes, broke off talks in frustration. Murdoch had hoped to merge Hughes into his SkyGlobal satellite TV venture, which would have dominated most of the world’s subscription satellite TV services.

Ergen said he, EchoStar president Michael Dugan, DirecTV president Eddy Hartenstein and Hughes CEO Jack Shaw will form a transition team to figure out logistics for combining the two ventures. Executives with GM said they expect the merger to close sometime in the second half of 2002. Ergen said one thing the team will decide is how to standardize the two platforms into a new hybrid system. That would likely involve replacing equipment for some or all of the 17.4 million subscribers of the combined company, but Hartenstein vowed any equipment change outs would likely be made at no cost to subscribers and with no inconveniences.

The combined company would be called the New EchoStar and DirecTV would be the brandname for its services, executives said.

In announcing the deal at a New York press conference, Ergen said combining EchoStar and DirecTV will create powerful synergies that will enable a satellite company to compete against cable operators on ‘a level playing field’ for the first time.

Among the benefits of a combined operation is a consolidation of spectrum that would enable the company to expand programming with all local TV channels, and expand HDTV and interactive TV services. Most importantly, it will enable the operation to provide comprehensive broadband services that could serve underserved rural markets as well as suburban and urban locations.

However, the transaction is likely to face stiff opposition from cable companies and others who see the merger creating a satellite TV monopoly. An organization called The National Consumers League has already issued statements denouncing the deal for the monopoly power it would have over rural television viewers, who do not have access to cable services. The merger also reportedly troubled some members of Congress.

If regulators ultimately reject the merger, EchoStar has agreed to pay about $5 billion in cash for Hughes’ PanAmSat Latin American operations. That commercial satellite operation is 80 percent owned by Hughes.

Manufacturing and service partners of DirecTV including Thomson (who RCA brand is the largest producer of satellite set-top boxes), TiVo and Microsoft’s UltimateTV division said that until they know more about transition they plan to take a ‘business as usual’ approach to the announcement.

A Thomson spokesman said the company views the proposed merger as ‘a new opportunity’ for Thomson to expand its leadership role in the production and distribution of satellite TV equipment.