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EchoStar makes its case for DirecTV buy

Nov 5, 2001  •  Post A Comment

GOP Sen. Conrad Burns is fond of saying there’s a lot of dirt between light bulbs in his home state of Montana.
Protecting the constituents who dot his expansive, rugged state has always meant siding with rural interests over urban ones and emphasizing the importance of not leaving country folk behind as new technologies are rolled out.
That’s why the planned EchoStar-DirecTV deal, which effectively limits many rural citizens to one source of programming, troubles him.
“I can say firsthand that in rural states like Montana, we don’t have many choices when it comes to television service providers,” the senator said. “This merger could stifle competition and drive up prices by limiting the choices even further.”
Montana, with 336,000 television households, according to Nielsen Media Research, has the second highest satellite television subscriber penetration in the nation at nearly 39 percent. That gives the state 130,777 satellite TV subscribers as of July 1, 2001, according to Sky Report, a satellite TV research firm in Golden, Colo. Most subscribe to DirecTV and EchoStar, but some are large-dish customers. Neither company would disclose its individual subscriber levels for the state, but one industry source speculated that DirecTV has close to a 60-40 edge, which would give it upward of 70,000 customers.
Many rural Americans, like those in Montana, have no access to cable and can’t get broadcast signals over the air, forcing them to rely on direct broadcast satellite for programming. Until now there have been two fierce DBS competitors, but that would change with the deal.
The planned merger might face its toughest challenge from Sen. Ernest Hollings, D-S.C., head of the influential Senate Commerce Committee. He has plenty of sway over the Federal Communications Commission, one of the agencies that will review the deal, because he heads the appropriations panels that fund it. The Justice Department’s antitrust division also will review the union.
Despite the hurdles in Washington, some think EchoStar Communications Chairman Charlie Ergen will successfully use the same down-to-earth appeal that convinced Hughes to sell to him over News Corp. to secure regulatory blessings for the $26 billion deal.
“I come from Indiana, and my background is one where we’re very plain talking, down to earth. People tell each other what they think. Then you spit on your hands and shake,” said Hughes CEO Jack Shaw. “Charlie impressed me as being very down to earth, even though he is a tough competitor. I felt I knew where he stood. His proposition and style were plain, simple and easy to understand.”
Mr. Ergen was so convincing that General Motors (Hughes’ parent company), which will own 11 percent of the new entity, has provided a bridge loan to back half of the $5.5 billion in cash it demanded from EchoStar to do the deal so that it can pay off some of its debt. EchoStar shareholders will own 36 percent, and Hughes shareholders will own 53 percent.
Mr. Ergen, who will command the new entity, which will be called EchoStar but sell Hughes’ DirecTV as a separate service offering, and his new partners last week estimated the new company can achieve $5 billion in annual synergies, cost cuts and increased revenues.
Mr. Ergen, a Tennessee native who started EchoStar 21 years ago with his wife, Cantey, attributes his snaring DirecTV from News Corp. to his willingness to put it all on the line.
“I’ve made a $600 million bet that this transaction will ultimately be completed.” Mr. Ergen said. “Scale is critical to survive.”
And he’s confident he can stop the deal from being blocked by antitrust concerns: “If I had a dollar for every time I have been told I couldn’t do something, I would be a billionaire.” Reminded that he was a billionaire, he said, “My case rests.”
Mr. Ergen and his new colleagues have already made the rounds on Capital Hill and at the Federal Communications Commission, where they left a one-page flyer behind summarizing the four leading promises and selling points, according to Eddy Hartenstein, DirecTV president. They also hired big gun antitrust lawyer David Boies, fresh off the landmark Microsoft antitrust case.
The combined company has promised to open up 10 to 12 high definition channels, provide full-service in 100 local markets covering 85 percent of the country, provide a uniform national pricing package that mirrors current prices and provide the nation’s 3.4 million rural householders with high-speed data service they cannot get any other way.
Last week, Mr. Ergen wasn’t willing to go any further on national pricing or safeguards for rural customers. “Our plan is to listen to what people’s concerns are and then come up with constructive ideas to solve those problems,” he said. “We’re pretty innovative. There’s lots that can be done.”
However, Sen. Hollings remained unconvinced about the corporate marriage after a face-to-face meeting Oct. 30 with Mr. Ergen and Mr. Hartenstein. The lawmaker still fears the deal would subject rural TV viewers to the whims of a satellite TV monopoly.
“What worries him is the fact that you’ve got No. 2 buying No. 1,” said Andy Davis, a spokesman for Sen. Hollings.