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U.S. Sues to Block DirecTV Merger

Justice Dept. and states worry about high prices. EchoStar, Hughes might fight over breakup fee.

November 01, 2002|Edmund Sanders | Times Staff Writer

WASHINGTON -- EchoStar Communication Corp.'s yearlong bid to take over satellite rival DirecTV appeared all but over Thursday as state and federal antitrust officials -- unimpressed by some last-minute concessions -- sued to block the merger.

The decision is likely to set off a series of intense legal maneuvers by the two satellite-TV rivals over $600 million in breakup fees tied to the failed merger.

The Justice Department and attorneys general for California and 22 other states determined that a combination of the nation's two satellite-TV providers would lead to higher prices, poorer service and reduced incentive for innovation. Three weeks ago, the Federal Communications Commission rejected the deal on similar grounds.

Though EchoStar and DirecTV's parent, Hughes Electronics Corp., have the legal right to press their case in court, the unusual one-two punch by the government makes it highly unlikely that the companies can salvage the $18-billion deal, analysts say. In most cases, merger partners give up after the Justice Department files suit.

"We continue to believe passionately that the merger of EchoStar and Hughes is the best chance to stop rising cable prices and to bring enhanced services to all Americans, especially those consumers living in rural America," EchoStar Chief Executive Charlie Ergen said in a statement.

"We are obviously disappointed that at this time we have not been able to convince regulatory officials to share our vision."

A statement from Hughes said the company would consult with EchoStar before determining its next move. Privately, DirecTV sources say they have no desire to fight the government in court but are obligated to go along with EchoStar until their merger agreement formally expires Jan. 21.

DirecTV Chief Executive Eddy Hartenstein said last month that he did not expect the agreement to be extended.

At Hughes' headquarters in El Segundo, many of the 1,200 employees, who feared a merger would result in large-scale layoffs, breathed a sigh of relief, sources said. Hughes is a unit of General Motors Corp.

With the collapse of the deal, analysts predict, EchoStar and DirecTV will return to being aggressive rivals, and they may well sue each other over the $600-million breakup fee that EchoStar has pledged to pay Hughes if the merger is not completed by the Jan. 21 deadline.

The contract also calls for EchoStar to purchase Hughes' stake in satellite operator PanAmSat Corp. for $2.7 billion.

The hefty breakup fee was insisted on by GM because it was concerned that the deal might run into antitrust problems.

The demise of the merger also opens the door again for Rupert Murdoch's News Corp. to renew its bid for DirecTV. Murdoch tried to buy DirecTV last year but was foiled by EchoStar.

In Washington, the merger of the nation's only two large-scale satellite-TV companies was always viewed as a longshot. The combined entity would have had 18 million customers.

Analysts say Ergen underestimated the antitrust issues and overestimated his own ability to charm regulators into giving him what he wanted.

Many in the industry also have speculated that EchoStar never seriously believed it could pull off a merger, but pressed ahead to keep DirecTV in limbo for nearly a year and out of the hands of Murdoch.

Consumers Union, which surprised many by lobbying in support of the merger, expressed disappointment that regulators did not try harder to modify the deal. The watchdog group, which typically opposes big media combinations, hoped that a combined EchoStar-DirecTV would create stronger competition for local cable operators, potentially lowering cable rates.

"As much as there were problems with the merger, the bigger problem is the fact that cable rates keep going up," said Gene Kimmelman, co-director of Consumers Union in Washington. "If the Bush administration refuses to do surgery on the merger, then what is the administration going to do to restrict the cable industry's monopolistic practices?"

But Jay Nixon, the Missouri attorney general who led the states' opposition, said the proposed merger would have created an illegal pay-television monopoly in many rural areas that cannot receive cable services.

State and federal regulators said they were unimpressed by EchoStar's last-ditch offer to transfer a chunk of its satellite frequencies to New York-based Cablevision Systems Corp., which is preparing to start its own satellite television service.

Nixon dismissed the idea as "inventing your own competition just as you cross the finish line in the race."

EchoStar's shares rose 57 cents on Thursday to close at $20.39 on Nasdaq, and Hughes' shares climbed 8 cents to $9.85 on the New York Stock Exchange.

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