[CIMC-work] Rupert Murdoch gets DirecTV

[Elizabeth Fraser]

I don't know if this is appropriate to the working list, whether there's
any local story here--but I think this is one of the scariest media
stories of the year.  Freespeech TV was trying to get DiecTV to carry
them (in addition to being available via Dish Network. Not that I have
any of the services but it makes you wonder about a call for DirecTV
folks to switch to Dish.--Elizabeth  

April 10, 2003
Murdoch Adds to Empire With Control of DirecTV
By ANDREW ROSS SORKIN

 
Completing the final piece in Rupert Murdoch's global satellite empire,
the News Corporation agreed yesterday to buy control of Hughes
Electronics and its DirecTV satellite operation from General Motors in a
deal valued at $6.6 billion.

The deal will give Mr. Murdoch even more power in determining what
programs are beamed to television sets across the United States and how
much consumers pay for them.

With the addition of DirecTV, the nation's largest satellite operator
with 11 million subscribers, the News Corporation will become one of
only a few media companies in the nation, among them AOL Time Warner,
that both create television programs and distribute them. The News
Corporation owns the Fox Network and dozens of local affiliates as well
as the increasingly powerful Fox News Channel and a clutch of heavily
watched regional Fox Sports networks.

Mr. Murdoch, the chairman and controlling shareholder of the News
Corporation, is expected to start a pricing war with cable companies
that could benefit consumers. His control of DirecTV will also give him
substantial leverage to defend his programming business against pressure
from a consolidating cable industry and, critics contend, possibly even
squeeze his cable rivals by raising the prices they pay for his
programs.

"We can help make satellite TV a viable competitor to cable," Mr.
Murdoch said on a conference call last night. "More programming options,
richer content and compelling new technologies will give satellite TV
the best chance to break cable's hold on viewers."

The deal ends nearly three years of bidding wars, changing alliances and
regulatory jockeying as Mr. Murdoch has sought to take over DirecTV in
an effort to make the News Corporation the dominant television
distributor in the world, with satellite operations serving more than
100 million households in the United States, Europe, Asia and Latin
America.

"I've always felt for years that if you're in the content creation
business, you must be somewhere in the distribution business to make
sure you're not wasting your efforts and your money," Mr. Murdoch said
on Fox News.

In 2001, Mr. Murdoch lost a bidding contest for control of Hughes to
EchoStar Communications, the nation's second-largest satellite operator.
That deal was rejected by regulators late last year after Mr. Murdoch
waged a behind-the-scenes lobbying campaign - circulating a 123-page
volume opposing the deal called "The Essential Guide to the
EchoStar/DirecTV Deal" around Washington - to block the agreement,
giving him a second chance.

Of course, the News Corporation's deal for Hughes will also require the
approval of regulators, including the Justice Department and the Federal
Communications Commission, and some consumer groups are already calling
for this deal to be blocked as well. But unlike the deal with EchoStar,
which would have combined the nation's two largest satellite television
companies, legal experts suggest that the deal with the News Corporation
will be approved because the company does not already compete in the
satellite distribution business in the United States.

The News Corporation's offer for Hughes is significantly lower than the
amount it offered in the 2001 bidding war - a deal worth about $22.5
billion - calling into question the decision by General Motors, which
controlled Hughes, to accept EchoStar's offer when it knew the chances
of that deal's being blocked were high. This time around, there was only
one bidder.

Rick Wagoner Jr., chief exective of G.M., contended in a conference call
yesterday that "the economic value is roughly the same" from this deal
with the News Corporation, compared with its offer in 2001, but he
declined to explain his math. A banker who worked on the transaction
laughed when he heard of Mr. Wagoner's comments.

Under the terms of the deal, which must be approved by Hughes
shareholders, the News Corporation would buy G.M.'s 19.9 percent stake
in Hughes for $14 a share, or $3.8 billion. Of that amount, at least
$3.1 billion would be paid in cash, with the rest in News Corporation
publicly traded securities.

The company would then make a tender offer for 14.1 percent of the
publicly traded Hughes shares for $14 a share in cash or News
Corporation securities.

The price represents a 22 percent premium over Hughes's stock price,
which closed yesterday at $11.48, down 2 cents, before the deal was
formally announced. The shares, which trade as a G.M. tracking stock,
edged up to $11.60 after hours. The News Corporation's American
depository receipts ended regular trading down 66 cents, at $27.22. G.M.
closed down 25 cents, at $34.48. 

G.M. is planning to use the cash it receives from the deal to reduce its
debt and strengthen its balance sheet.

The News Corporation would end up controlling 34 percent of Hughes,
while the General Motors Pension Trust, which is separate from G.M.,
would continue to own 21 percent and the public would own the remaining
45 percent. Hughes will eventually be folded into the Fox Entertainment
Group.

It is unclear what the effect of the deal will be on consumers, but some
are crying foul.

"Hold on to your wallet," said Gene Kimmelman, co-director of the
Consumers Union, a consumer advocacy group that supported the
EchoStar-Hughes deal. "Prices will go through the roof." 

Mr. Kimmelman said he was worried that the News Corporation would raise
programming fees for cable operators by threatening to pull his networks
off their systems, pushing cable prices for subscribers even higher.

"He has no incentive to price-compete against cable as long they pay a
hefty fee for his programming," Mr. Kimmelman said.

The News Corporation disputes that contention and says that any price
increases will have to be passed on to DirecTV as well, making higher
programming prices less attractive.

"We have every intention of being a fair player," Mr. Murdoch said.

The News Corporation already owns satellite networks around the world,
giving it considerably more influence when negotiating to buy
satellite-receiving dishes, set-top boxes and other gear. That could
enable DirecTV to substantially lower the average cost of acquiring each
new customer, now estimated at more than $500 a household. 

Mr. Murdoch also expects to expand the DirecTV subscriber base by
aggressively marketing the service through his Fox TV outlets. And he
will be able to eliminate Hughes's middleman status and reap the revenue
directly each time a DirecTV viewer watches one of the News
Corporation's 20th Century Fox films on pay per view.

Mr. Murdoch is hoping to repeat the success he has had with British Sky
Broadcasting with DirecTV. He has turned BSkyB into the largest pay
television operator in Britain by offering exclusive programming, like
soccer matches, and has led the field in offering interactive services,
like different camera angles for sporting events. It also offers
programmable video recorders like the popular TiVo service.

G.M. said that Mr. Murdoch would become chairman of Hughes and that
Chase Carey, the News Corporation's former co-chief operating officer,
would be president and chief executive. Eddy Hartenstein, senior
executive vice president of Hughes, will be vice chairman of Hughes. 

An army of investment bankers and lawyers worked on the deal, many for
more than three years. Indeed, half a dozen investment banks have worked
on the transaction for little or no money because they are paid only
after a deal is completed. Citigroup and J. P. Morgan Securities Inc.
acted as financial advisers to the News Corporation, while Skadden,
Arps, Slate, Meagher & Flom; Hogan & Hartson and Harris, Wiltshire &
Grannis provided legal advice.

Merrill Lynch and Bear Stearns acted as financial advisers to G.M., and
Jenner & Block; Kirkland & Ellis; and Richards, Layton & Finger provided
legal advice.

Goldman Sachs and Credit Suisse First Boston acted as financial advisers
to Hughes Electronics and Weil, Gotshal & Manges; Latham & Watkins;
Wiley, Rein & Fielding; and Jones Day provided legal advice.

Copyright 2003


Elizabeth Fraser
ehf@bookbeast.com