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Widening Its Orbit

Hughes Announces Pact to Buy Satellite


When a company unveils plans to shell out $3 billion to buy another firm, including $1.5 billion in borrowed cash, Wall Street usually is quick to push down the buyer's stock to account for those costs.

But not the stock of Hughes Electronics Corp., and not Friday.

Hughes' shares surged even though the Los Angeles-based company confirmed widespread speculation and announced a pact to buy PanAmSat Corp. for $30 a share, or $3 billion, in cash and stock.

Why? PanAmSat is a young, small company with a big asset: It operates four satellites that give broadcast, cable and direct-to-home television programmers access to rapidly expanding markets in Asia, Latin America and other foreign lands.

Hughes, a General Motors Corp. subsidiary whose Galaxy fleet has 10 satellites, is the leading operator of similar services for domestic customers. So PanAmSat would immediately extend its reach worldwide.

PanAmSat and Hughes also have another seven, more advanced satellites that they plan to launch in the next two years, which would increase the amount of satellite space they can offer customers by 85%.

The planned merger "makes a lot of strategic sense," said Roger R. Threlfall, an analyst at J.P. Morgan Securities Inc. in New York. Moreover, the deal will help investors see that Hughes' satellite business is worth more on its own than as one of the cogs in the Hughes wheel, analysts said.

As part of their deal, Hughes and PanAmSat will meld their satellite operations into a separate public company that will keep the PanAmSat name and be 71.5% owned by Hughes.

The market price of that new stock is expected to put a higher value on Hughes' satellite business than before, which in turn is expected to boost Hughes' own stock price. Analysts call that "unlocking" the value of a diversified company.

Amid that prospect, Hughes' stock--technically GM's Class H stock that represents Hughes' results--jumped $2.50 a share, to $60.25, in New York Stock Exchange composite trading. PanAmSat's stock slipped 12.5 cents, to $27.625 a share, on the Nasdaq Market.

Some analysts, in fact, believe Hughes will undertake more deals aimed at unlocking the value of its various operations.

For instance, Hughes also runs DirecTV, a fledgling satellite-based direct-to-home TV service that's rapidly growing in popularity. "We've been looking for Hughes to sell a portion of DirecTV to the public in early 1997 after it becomes profitable," said James Reynolds, an analyst at Wedbush Morgan Securities in Los Angeles.

The PanAmSat deal also would help build up the smallest of the three main pieces of Hughes: its telecommunications and space group. Although that group is also the world's largest satellite manufacturer--its "birds" are built in El Segundo--Hughes' automotive-parts and aerospace-defense units were bigger contributors to Hughes' overall $14.8 billion in sales last year.

The PanAmSat agreement also could be a step toward Hughes' eventual spinoff from its parent, GM. Both companies won't say whether a split is imminent, but speculation is widespread that it's only a matter of time before GM divests Hughes either in whole or in parts.

GM, after all, is sitting on a $19-billion paper profit from its purchase of Hughes in 1985 for $5 billion. And C. Michael Armstrong, Hughes' chief executive, "would clearly like not to be part of GM" any longer, Threlfall said.

But Armstrong said the PanAmSat purchase is unrelated to any future spinoff or other change in the GM-Hughes structure.

"This is just a damn smart investment" by Hughes in an "exploding" market, Armstrong said in a telephone interview. "We see enormous growth in satellite communications around the world."

Indeed, although Hughes' $3-billion bid appears princely in light of PanAmSat's mere $116 million in revenue last year, Hughes is actually paying for PanAmSat's growth prospects.

PanAmSat, based in Greenwich, Conn., was founded in 1984 by businessman Rene Anselmo, who died a year ago. Its first satellite was launched in 1988 and, although the firm sold stock to the public last year, Anselmo's family and Mexico's Grupo Televisa still each own about 40.5% of the company.

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