Saving EchoStar deal

Scene of battle shifts to FCC, DOJ negotiating tables
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On Oct. 10, the FCC "declined to approve" EchoStar's proposed acquisition of its competitor, DirecTV, and gave the parties 30 days to redo the deal to ameliorate its competitive concerns. Can EchoStar Chairman Charlie Ergen overcome these regulatory objections? Perhaps more interesting, will Hughes Electronics, DirecTV's parent, give him the opportunity to do so?

The battle now shifts to the negotiating tables at the FCC and the Department of Justice, which has also been evaluating the merger. Though normally "going first" in major media mergers, the DOJ still has a role here. If EchoStar and Hughes can get the DOJ to sign off on a last-minute divestiture plan (a big "if" since its staff has also expressed skepticism), the FCC will probably approve the revised merger.

The FCC's decision effectively compels EchoStar to sell a significant amount of spectrum to a new competitor before it can acquire DirecTV. If a win-win divestiture package is possible, three basic ingredients must be present. First, EchoStar must give up enough spectrum for the new entrant to approximate DirecTV's competitive position. Second, even with enough spectrum, the new entrant must also have the wherewithal to be a viable competitor. Third, a deal must be hammered out with the regulators in or close to 30 days.

The sticking point here is that EchoStar will not divest so much spectrum that the benefits of buying DirecTV are destroyed. Any divestiture proposal is likely to involve the sale of a collection of assets (mainly spectrum) that will not by itself constitute a stand-alone business. Thus, a prospective buyer, including Cablevision, which seems interested, will have to demonstrate it can take the spectrum and quickly build a viable business, a task that may be impossible. The DOJ is also skeptical of divestiture proposals that do not involve a stand-alone business or long-term entanglements and regulatory oversight. Even if a satisfactory divestiture is theoretically possible, the government's evaluation of the fix may simply take too long.

A negative decision by either FCC or DOJ will be subject to judicial review, so EchoStar may have its day in court. Given its combativeness, one could expect a fight. A court battle will take time, but the merger agreement's fine print suggests Hughes may not be inclined to go along.

Hughes can terminate the merger if it is not completed by Jan. 21. If the FCC does not approve by the "drop-dead date," EchoStar would be required to pay Hughes a $600 million break-up fee and purchase its PanAmSat interests on terms favorable to the seller. (Although EchoStar may challenge the break-up fee on grounds that Hughes did not use "best efforts" to obtain approval, it may be difficult for EchoStar to show that Hughes should have behaved any differently.)

Given these financial incentives, Hughes may not want to give EchoStar any more time than the contract requires. On the other hand, the break-up fee and PanAmSat deal may be cold comfort indeed for Hughes if the next best bid comes in low. Rupert Murdoch was the only other serious suitor last time around and, knowing that he doesn't have to compete with Ergen, may not want to bid anything close to EchoStar's $19 billion, in which case Hughes might stay and fight.

Although the deal may still be alive, the endgame is nigh. EchoStar is hopeful that the regulators will relent or, if they don't, that the prospect of a substantially reduced purchase will keep Hughes in the fight. Hughes is carefully living up to the letter of the contract and calculating whether Murdoch or others will bid a decent price. Rupert Murdoch is giving Charlie Ergen no grounds for claiming interference.

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