Murdoch at Liberty To Make DBS Play
There's one big reason the divorce settlement between EchoStar and DirecTV came months earlier than pretty much anyone expected: General Motors is in a hurry to have Rupert Murdoch come back a-courtin'.
GM's failure to complete the $30 billion sale of DirecTV parent Hughes Electronics leaves the giant automaker in the same position it was a year ago when it rejected News Corp. Chairman Murdoch's bid in favor of EchoStar's. GM needs cash, was working to raise $10 billion and now can no longer count on a $4.2 billion payout from its substantial Hughes stake.
So, instead of moving at its characteristically glacial pace, GM moved quickly last Tuesday. In exchange for Ergen's honoring his agreement to pay the $600 million breakup fee, GM let him out of his $2.8 billion obligation to buy Hughes's 81% stake in international satellite carrier PanAmSat.
News Corp. executives had expected the divorce to stretch out for months and months while Ergen haggled to limit his payout, with the side benefit of tying DirecTV up in knots. "No one expected it this soon," said one News Corp. executive. "We're figuring out what to do next." DirecTV Chairman Eddy Hartenstein said the decision was made by GM, but the reasoning was simple. "You move on. That's indeed what we're doing. Give us a chance to move forward."
It's pretty clear that Murdoch is going to make another run. He acknowledges continuing interest, and Liberty Media President Dobb Bennett says he's willing to back another Murdoch run, as Liberty did in 2000.
"We're talking about it," Bennett said at UBS Warburg's media investment conference, adding that Liberty might even go it alone if Murdoch balks for some reason.
The attraction is "a national footprint," Bennett said. The only cable player that comes close to that is Comcast, and that portfolio can't be recreated.
News Corp. unit Fox Entertainment sold $1.3 billion worth of stock last month, leaving Murdoch with about $3.3 billion in cash.
But he may not rush in. Although Hughes's stock price has slipped and Murdoch is stronger financially, there are some financial challenges to complete a takeover.
Murdoch's last $23 billion bid was a hodgepodge offer through a special entity, Sky Global, that hinged on cash from Liberty and Microsoft, plus various News Corp. media assets. Those assets now aren't worth as much, however—notably, $5 billion worth of stock in interactive-program-guide developer Gemstar-TV Guide International has plunged to $500 million.
Last month, Murdoch said that he's now primarily interested in acquiring GM's 30% stake in Hughes. That's currently worth around $4.3 billion, down from $12 billion when he first made an offer to buy the company in February 2000.
However, a bid for only GM's stake will draw howls from Hughes shareholders left out of the transaction.
Also, Murdoch wants to punish GM executives a little more for having rejected him to begin with. "Rupert's been saying he wants them to squirm a little bit," said one Wall Street executive. Of course, GM executives are equally annoyed that Murdoch helped successfully lobby the Department of Justice and the Federal Communications Commission to reject the EchoStar takeover on antitrust grounds.
But first, DirecTV needs to keep its business on track. Hartenstein dismissed industry executives' criticism that DirecTV has surrendered some of its operating advantages during the year-long merger efforts.
For example, DirecTV eased exclusive arrangements with some big retailers, letting EchoStar dishes be sold through the likes of Wal-Mart and Radio Shack. What's more, DirecTV's subscriber growth has been short of expectations, and subscriber-acquisition cost (or SAC, which includes commissions and advertising) has flattened but remains a high $530 per new sub.
However, DirecTV isn't seeing the same increase in churn that EchoStar is experiencing when customers who signed up for $19.95-per-month promotions eventually have to pay the full $31.59 monthly tab. (DirecTV's cheapest package is $32.)
And Hartenstein contends that average revenue per unit (ARPU) has still been growing. "We're focused on keeping churn and SAC down and ARPU up. We're three for three."