News Corp., DirecTV Hint at Satellite Plans

Oct 18, 2004  •  Post A Comment

In simplifying the ownership structure of News Corp.’s and DirecTV Group’s Latin American satellite operations, both companies might have sent some signals about their plans with respect to the Hispanic markets in both the United States and Latin America, some Wall Street analysts are suggesting.

DirecTV Group last week unveiled a $579 million plan in which the satellite operator will enter into a series of transactions designed to combine its Latin American operations with those of controlling shareholder News Corp. in the region.

The deals consolidate DirecTV’s businesses in the region, give News Corp. the opportunity to sell off nonstrategic, money-losing assets and enable DirecTV to further build up its marketing efforts to Hispanics. And because News Corp. controls 34 percent of DirecTV, some analysts believe the media giant might one day leverage its ties to DirecTV to make a play for the growing and lucrative Hispanic market.

Case in point: As part of the complicated series of deals into which DirecTV and News Corp. are entering, News Corp. and Mexican television programmer Grupo Televisa agreed to partner and develop strategies that would mine the Hispanic market in the United States. Further, DirecTV agreed to carry two Televisa channels on its Spanish-language programming tier as soon as an exclusive carriage agreement with rival satellite operator EchoStar Communications expires.

“In our view, this could be a prelude to News Corp.’s broader plans for the U.S. Hispanic market, the fastest-growing segment within U.S. media,” Merrill Lynch media analyst Jessica Reif Cohen said in a research note.

Indeed, people familiar with the situation say that News Corp. has considered launching a Hispanic network, though the plans are in the early stages as the company prepares to launch a reality cable channel.

A News Corp. spokesman declined to comment.

For DirecTV, the transactions provide the satellite operator fresh territory within which to attract new customers. The company estimates it can boost to 5 million the number of subscribers it has in Latin America in three to five years, versus the present total of 3.3 million across the different platforms in the region. The actual number could be higher, however, given that Latin America has 40 million households ripe to receive pay-TV service and yet just 15 million receive the service today.

Another factor working in DirecTV’s favor is that many of the cable operators in the region are in the throes of financial restructurings, or would require significant investment in order to compete with DirecTV’s multichannel offerings.

Cash Deals

As part of the three-step transaction announced last week, DirecTV will control satellite systems in Brazil and in other parts of Latin America and will be a major shareholder of a satellite service in Mexico. DirecTV will pay cash in all three deals.

DirecTV CEO Chase Carey estimated that DirecTV would spend around $100 million on new equipment for customers in the region and predicted the ventures would begin generating positive cash flow in 2005.

In Brazil, DirecTV will merge its operations with News Corp.’s Sky Brasil. In that transaction, which is subject to Brazilian government approval, DirecTV will migrate its 423,000 customers to Sky Brasil, which has 806,000 subscribers, in exchange for shares representing about 30 percent of the newly merged entity. DirecTV will also acquire the stakes in Sky Brasil owned by News Corp. and Liberty Media International, giving DirecTV ultimately 72 percent control and principal management of the new company. The remaining 28 percent will be owned by Sky Brasil’s programming partner Globo Communicacoes e Participacoes SA.

In Mexico, DirecTV agreed to sell its list of 266,000 subscribers to Sky Mexico, which has 940,000 customers, in exchange for an adjustable note that when paid in 18 months gives DirecTV 15 percent equity in Sky Mexico. When DirecTV gets that stake, it, along with Sky Mexico co-owner Grupo Televisa, will buy Liberty Media International’s stake in the Mexican satellite operator. DirecTV will also purchase News Corp.’s stake in Sky Mexico. Following those transactions, Televisa will control 47 percent of Sky Mexico, while DirecTV will own 43 percent.

In the final transaction, DirecTV agreed to buy the interests in Sky Multi-Country Partners from Globo, Televisa and Liberty Media International, and will merge 89,000 customers in Chile and Colombia with Sky Multi-Country to create a single platform to be called PanAmerican that will be 100 percent controlled by DirecTV. With 938,000 customers, PanAmerican will serve customers in Argentina, Chile, Colombia, Venezuela, Puerto Rico, the Caribbean and the rest of Latin America.