EchoStar, DirecTV Tussle
Legal battles loom with DoJ, FCC and Hughes over breakup fee
By Bill McConnell -- Broadcasting & Cable, 12/8/2002 7:00:00 PM
EchoStar's lawyers shouldn't count on taking life easy this holiday season. Company attorneys are likely to need the next few weeks preparing for a three-front legal battle over EchoStar's bid for DirecTV.
Two struggles with the Justice Department and the FCC are in their opening stages, and the third is likely to begin in early January after DirecTV parent General Motors/Hughes announced last week that it will walk away from the deal—and demand a $600 million breakup fee—rather than continue fighting the government. EchoStar Chairman Charlie Ergen also would be bound to honor a $2.7 billion acquisition of Hughes's 81% stake in ailing international satellite operator PanAmSat.
"Hughes and General Motors will not waive any termination provisions in the merger agreement," a Hughes spokesman said.
EchoStar officials aren't giving up hope that Hughes would extend two deadlines included in the merger contract until the FCC completes its review of an amended merger application submitted just before Thanksgiving. But it's clear they will be spend the next few weeks preparing for a possible legal clash with Hughes or negotiating a lower breakup fee.
"The only certainty is that Ergen is going to write checks to lawyers before he writes checks to DirecTV," says Legg Mason analyst Blair Levin.
The most important of the two deadlines allows Hughes to walk away with its wad of cash if the FCC hasn't approved the merger by Jan. 6. The company also may back out with the money if the merger isn't consummated by Jan. 23.
It's unlikely the FCC's review of the amended merger agreement will finish by either date, given that public comments on the new offer aren't due until Jan. 3 and replies until Jan. 21.
Nevertheless, EchoStar officials are hoping that Hughes will stick with the merger out of concern that a better deal won't be coming from other potential suitors.
"EchoStar is willing to extend application-termination dates in our contract to make allowances for the FCC comment period," said a company spokesman. "Concerning government comment period, we will read the comments and respond accordingly."
Neither company would address whether they would end up fighting in court if Hughes refuses to extend the deadlines.
Hughes could defuse a potential court battle by reducing the breakup fee, but it's unclear how far the company will go given that it wants compensation for subscriber growth lost to EchoStar while the merger was under review during the past year.
"Hughes probably holds the upper hand legally, but EchoStar has the benefit of time," Levin says. "At some point, the parties will come up with a settlement that lets Ergen pay less than the terms of the contract."
If Hughes holds firm, many predict that Ergen will fight the breakup fee in court, perhaps arguing that DirecTV has not given best efforts to win regulatory approval and that the deteriorating conditions of PanAmSat created a "material adverse change" that warrants renegotiation.
Certainly, Ergen doesn't concede defeat quickly and has won a reputation for fighting until the last available option.
His resistance to compromise is one reason the FCC was skeptical that EchoStar could revise its original merger agreement to assuage concerns about joining the only two substantial DBS providers. "They have a very steep hill to climb," Media Bureau Chief Ken Ferree said when the decision to block the merger was announced in October.
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