In the latest consolidation of the nation's satellite television business, DirecTV has agreed to acquire its partner United States Satellite Broadcasting Co. in a stock and cash transaction valued at about $1.3 billion.
The deal, long considered inevitable by Wall Street, is expected to strengthen DirecTV's lead in the satellite television business at a time when the El Segundo-based company faces increasing pressure from its chief rival, EchoStar Communications Corp. of Englewood, Colo.
For the Record
Los Angeles Times Wednesday December 16, 1998 Home Edition Business Part C Page 3 Financial Desk 2 inches; 45 words Type of Material: Correction; Wire
USSB acquisition--An article Tuesday about DirecTV's acquisition of United States Satellite Broadcasting Co. misstated one of the terms. USSB stockholders would be able to exchange each of their shares for 0.3775 share of General Motors Class H stock as long as the GM stock trades within a range of $27.82 to $47.68 a share.
Under Monday's deal, DirecTV will for the first time in its history control the sales and billing of basic as well as premium television channels, the most popular of which are now controlled by St. Paul, Minn.-based USSB. Analysts say that should simplify DirecTV's product offering, speed adoption of the product and perhaps even reduce prices, especially if cost savings resulting from the proposed merger are passed along to customers.
"We realized that to move to the next level, we had to simplify the product for customers at the retail level," said Stanley E. Hubbard, president and chief executive of USSB. "It just provides a lot more flexibility when all the programming can be offered in one package."
DirecTV, a unit of General Motors Corp.'s Hughes Electronics subsidiary, serves nearly 4.3 million satellite TV subscribers, making it the nation's fifth-largest pay television service, after four large cable providers. But to hedge its bets before it launched its service in 1994, DirecTV sold several frequencies on one of its satellites to USSB, which is 51% owned by the Hubbard Broadcasting television station group.
The two companies have operated as partners since, with USSB selling a package of services licensed from Viacom Inc. and Time Warner Inc. and DirecTV concentrating on the remaining channels. The partners promote each other's services but maintain separate billing, customer service and marketing operations in what many analysts viewed as a confusing and inefficient arrangement.
Last year, USSB relinquished to DirecTV the basic Viacom networks--MTV, Nickelodeon and VH1--to concentrate solely on premium services such as HBO and Showtime, which were launching new channels.
Today, all but 200,000 of USSB's 2 million subscribers are also DirecTV subscribers.
"The Street has wanted this merger for two years," said Vijay Jayant, an analyst at Bear Stearns. "It simplifies the proposition."
Analysts said DirecTV is paying a generous price to USSB. The final price will be set at the deal's close, with USSB having the option of taking payment in cash or stock. Each USSB shareholder will receive 0.375 share of General Motors' Class H shares. Based on USSB's current trading range, the deal is valued at a stiff premium of more than 100%--valuing USSB at between $26 and $48 a share.
USSB shares closed up $2.81 at $12.44 on Nasdaq, while GM's H shares closed down $1.28 at $33.69 on the New York Stock Exchange.
DirecTV, which expects to make its first profit in the second quarter of 1999, projects savings of $160 million a year or more by merging the companies' customer service, sales and billing operations. Jayant predicted "a blood bath at USSB" as a result of the acquisition because of widespread duplication, and Hubbard agreed that all his employees could be wiped out. He said generous severance packages are required under the deal.
In addition to the new subscribers--DirecTV would have 4.5 million after the merger--the company is acquiring satellite capacity that it promises to use for a Spanish-language package of 15 to 20 new channels. Ethnic customers, along with women and older viewers, are considered to be underserved audiences.
Michael T. Smith, chairman and chief executive of Hughes, said that within the next month, the company will announce plans for using new technology to offer two-way, high-speed connections to the Internet that will make the company's offerings more competitive with the cable industry. DirecTV currently offers a slower means for connecting to the Internet, using satellite one-way and slower telephone wires on the return path.
Analysts speculated that the acquisition was put on the fast track because of EchoStar's gains in recent months. That upstart company, with 1.7 million subscribers, has been offering big discounts and clever incentives to distributors during the holiday buying season that have enabled it to add subscribers at nearly as brisk a pace as DirecTV, despite having half as many distributors.
What's more, EchoStar doubled its satellite capacity last month by agreeing to purchase assets from a potential competitor, American Sky Broadcasting, a joint venture of News Corp. and MCI WorldCom Inc. The deal would give EchoStar control of two of the three satellite slots able to send signals to households anywhere in the United States. EchoStar, which sells its service under the Dish Network brand, promises to offer more than 500 channels.
But both partners dismissed the EchoStar development as having nothing to do with their transaction.
"We had a handshake before the EchoStar deal was announced," Hubbard said, adding that the transaction would make his company the largest shareholder in Hughes after GM, with less than 4%.