SEC EXPECTED TO FINISH DBS MERGER REVIEW IN JUNE
SEC is expected to complete review of proposed $26 billion EchoStar acquisition of Hughes Electronics by June and FCC could finish its investigation by late summer, EchoStar CEO Charles Ergen told analysts in conference call Thurs. Deal will carry $7 billion in merger-related costs, $5.5 billion of which will be financed by bridge loan, EchoStar said in SEC filing. Loan amount has been reduced to $3.3 billion by EchoStar’s sale in Dec. of $700 million of 9.18% senior debt. It also sold $1.5 billion in preferred stock to Vivendi Universal.
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EchoStar, crediting increased subscribers and expansion of Digital Home Plan, said 4th quarter net loss narrowed to $42.8 million from $184.1 million year ago as revenue rose to $1.15 billion from $805.3 million. Earnings before interest, taxes, depreciation and amortization rose to $171 million from negative $42 million year earlier. EchoStar added 400,000 net new subscribers to bring year-end total additions to 1.5 million, which was at low end of company’s forecast. Total subscribers passed 7 million in Feb. and are projected to hit 8 million by year-end, company said.
Company commitment to provide local service in each market was reaffirmed by spokeswoman. She said 1,600 local stations would be added in 210 markets as promised at Mon. news conference, despite skepticism of some rural groups. Number of stations offered in each market ranges from 6 in smaller DMAs to 20 in large markets such as N.Y. and L.A., spokeswoman said. New equipment will be provided free. “We will carry all stations in each market that meet must-carry requirements.”
EchoStar has committed $300 million to project for satellites and ground stations and said success in larger markets would make it financially possible to serve smaller, less-profitable ones. For example, in Mont., it said all 9 markets would receive DBS broadband service along with local stations. Currently, customers in communities without DBS must pay additional fees to receive local channels or install off-air, rooftop antenna. Without deal, companies said, they would lack spectrum to provide service. Ergen said earlier he would sign consent agreement with broadcasters to ensure compliance. Officials of EchoStar, DirecTV and Hughes were expected to meet with broadcast leaders before Hill hearings next week. “We are going to stay in Washington for as long as it takes to get this done,” Ergen said.
Combined companies would use 30% of satellite capacity and 28 of 32 frequencies to provide local service. One rural operator wondered whether there would be enough capacity left to provide broadband service. Another rural provider said EchoStar-DirecTV combination still wouldn’t have enough “bandwidth to compete” with local cable companies that offered dozens of local access and independent channels in addition to network affiliates. “No one can make a business out of satellite broadband today without a path,” Ergen said, citing failures of other broadband projects: “Without merger, there’s no way to make a business out of it.” Both companies offer service, but it’s not cost-effective, Hughes CEO Jack Shaw said. Merged companies are counting on large subscriber bases to drive prices down. “By merging, you can cut the capital costs in half, instead of each company spending a couple of billion dollars to build this service.”
Critics of deal remain skeptical but appear to be shifting focus from local carriage to monopolistic aspects. In most markets, Hughes and EchoStar compete with one dominant cable operator. If deal is approved, number of competitors would drop to 2 from 3 and in 3 million rural homes where there’s no cable service, number of competitors would decrease to 1 from 2, unless new service provider were licensed, critics said. “That’s why we believe we have a tremendous business opportunity,” Northpoint CEO Sophia Collier said. Monopoly still is concern of most, Precursor Group CEO Scott Cleland said: “By any standard,” EchoStar- DirecTV deal will “substantially lessen competition,” which will hurt chances for approval.
Ergen said he believed decision to carry local channels in all 210 markets would make difference in regulatory review. “Absent the politics, we should have great support for the merger,” he said. He said deal was identical to Greyhound-Trailways merger. Together Greyhound and Trailways represented entire bus transportation market, which was only small part of overall transportation market, Ergen said. Likewise, “we'll be 100% of the satellite market, but we're a small piece of the pay-TV market.”
On legal front, International Trade Commission (ITC) is expected to rule later this month on complaint filed by Gemstar-TV Guide International that alleged EchoStar had infringed on its patents covering electronic program guide technology. Companies presented arguments to ITC earlier this year and decision is expected by March 21, Ergen said. Decision also is expected by midmonth on Disney’s request for injunction that would bar EchoStar from dropping Family Channel from programming lineup. EchoStar dropped ESPN Classic late last year along with Family Channel after failing to reach agreement on carriage fees. Family Channel was restored to EchoStar network under temporary injunction.
In related announcement, DirecTV said Thurs. it would carry Rural TV Channel’s RFD-TV. Station will become available today (Fri). DirecTV spokesman said decision to carry station had nothing to do with opposition from rural groups.