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Hughes Chief Maneuvers Against News Corp.'s Bid


Hughes Electronics Corp. Chairman Michael Smith has become a key obstacle in News Corp.'s attempt to gain control of the satellite company, according to several people close to the negotiations.

Smith is promoting a proposal under which Hughes, the owner of DirecTV, would be spun off from parent company General Motors Corp., without the involvement of News Corp.

Sources say Smith is trying to convince other parties to take a stake in the new company. Among them is Microsoft, which had earlier agreed to join News Corp.'s team and invest as much as $5 billion as part of that effort, according to several sources.

If Smith fails to interest another investor, he might attempt to raise as much as $6 billion in debt to pay off GM and make Hughes independent. Analysts say Hughes is under-leveraged and could afford to take on the debt.

Smith has been pursuing the alternatives since details of an agreement in principle between Hughes and News Corp. leaked out early last month, angering Hughes shareholders who were expecting a better price than the proposed $70-billion deal. Hughes shareholders began bailing out of the stock, driving shares from $27.71 in early February to Friday's $22.90 close.

Wall Street sources say the deal, as leaked to the press, is dead, although communications between News Corp. and Hughes continue. Smith, for one, has been urging News Corp. to revise the terms in Hughes' favor.

Under the News Corp. proposal, Smith would be out of a job. News Corp.'s management scenario would have Hughes' second in command, DirecTV Chairman Eddy Hartenstein reporting to Chase Carey, the chief of Sky Global Networks, which holds a portfolio of News Corp.'s satellite assets, including Britain's BSkyB and Asia's StarTV.

Many Hughes investors applaud the behind-the-scenes maneuvering by Smith. They believe the company would be better off freed from GM and continuing under current management than being taken over by News Corp. Chairman Rupert Murdoch, whose free-spending habits make investors wary.

Yet others believe that News Corp. is still Hughes's best hope for growth and predict that the two companies will ultimately come to terms.

"The important thing is not only for Hughes to come out of the GM family but to combine with the News Corp. satellite assets because of the benefits of scale, including the sharing of content over a larger global base of satellite subscribers," said Tom Eagan, an analyst at UBS Warburg. "GM has to do something because the roll-out of DirecTV's new services has been slow. A partner like News Corp. could help subsidize the new set-top box and lower costs below the current $400 to $500."

Hughes is a "tracking stock" of GM, meaning that public shareholders do not own the underlying assets of the company but can participate in their financial performance. Many Hughes investors prefer independence from GM to eliminate the penalty that Wall Street imposes on tracking stocks. In addition, it is widely believed that GM's conservative management of the asset has held back DirecTV's growth prospects.

DirecTV was baited several years ago by its spunky rival EchoStar Communications Corp. into heavily discounting the price of the satellite equipment and installation charges. DirecTV's growth has been on a fast-track since and is now approaching 10 million subscribers, nearly as many as leading cable rivals AOL Time Warner and AT&T.

But some industry critics say DirecTV should have pushed harder earlier to pick off cable customers before that industry had the chance to upgrade its networks with digital technology and offer customers a superior package.

Potential suitors that have looked at Hughes' books since investment bankers began shopping for a buyer last fall say DirecTV's rising customer churn and costs of acquiring customers are indicative of the difficulty DirecTV will experience as it pushes deeper into the cable industry's core urban markets. There are also questions about when DirecTV will be able to turn a profit. Its cost of acquiring a customer has risen to $525, up from $425 nearly 2 1/2 years ago, according to the Carmel Group, a research firm in Carmel, Calif.

For its part, GM is eager to cash in its Hughes investment to remove a financial drain at a time when the economic downturn is hurting its car sales. Under the News Corp. proposal, GM would receive as much as $8 billion in cash.

The GM board encouraged Hughes management to proceed with the complicated News Corp. deal when it was briefed on the terms at a regularly scheduled board meeting Feb. 6. News Corp. sources say GM is still on board but is treading carefully because so many of Hughes shareholders are irate about the terms. Although GM controls all the voting shares of Hughes, it owns only about 30% of the publicly traded shares.

A spin off of Hughes by GM would not preclude Murdoch from merging his assets into Hughes at a later date. Under the previous proposal, News Corp. was to have owned 35% of the merged entity, with the existing Hughes shareholders controlling the remaining 65%. Smith has been pushing News Corp. to rejigger the terms to a 30-70 split.

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