Why DirecTV Will Wind Up in Murdoch's Orbit


By Ron Grover About the worst-kept secret in the media world these days is that satellite-TV service DirecTV is for sale. Moreover, it's generally assumed that the service, with some 9.5 million subscribers in the U.S., is headed to Rupert Murdoch's News Corp., which wants it to add to News Corp.-controlled services in Asia, Europe, and Latin America.

General Motors' Hughes Electronics Corp., which owns DirecTV, admits it is up for sale. News Corp. executives openly say they're very interested in buying Hughes, which ran up revenues of $7.3 billion in 2000, $6.3 billion of which came from the DirecTV unit. The rest of Hughes' revenues came from the sale of wireless services and satellite services for businesses, most of which Murdoch is likely to keep.

With both sides talking for more than three months, why has it taken so long to get this deal done? The asking price is fairly well-known. At current prices, Hughes Electronics is valued at around $23 billion, putting a likely Murdoch bid in the $40 billion range. Murdoch is notorious for overpaying for assets he wants, and he clearly wants this one. It would give him guaranteed distribution for his Fox-branded programming in the U.S., meaning he wouldn't face the kinds of roadblocks that forced him to pay steep fees to get cable channels fx and Fox News on the air a few years ago.

RUPERT'S WAY. The problem is that Murdoch is, well, Murdoch. Insiders tell me General Motors, which controls Hughes through its 30% ownership, isn't terribly anxious to take cash for its stake. Instead, GM is looking for a deal that will include some cash, but a lot of stock. And frankly, Murdoch has never managed News Corp. with its stock price in mind. He owns 30% of the company and can pretty much do what he wants. And what he wants to do is to take risks to build the largest media company he can, something that has kept his stock trading at about where it was two years back.

Of course, it's understandable that GM wants to be paid in a stock that's likely to see some upside. That's why, I'm told, Hughes executives have been beating the bushes to find another buyer. Their first choice was Walt Disney Co., which has traditionally been managed for the shareholder -- even if its stock price has been down for most of the past year. Disney was a natural choice: In August, the media giant had just finished fighting with Time Warner over having Disney's ABC network taken off some of Time Warner's cable system. And having DirecTV would give Disney the leverage to make sure their network always had an audience. (At one point, Disney threatened to fight back against Time Warner by giving customers in Houston free DirecTV dishes.)

Disney passed on buying DirecTV, I'm told, early in the process. For starters, Disney Chairman Michael D. Eisner isn't a big fan of getting into bidding wars and knew it would take a steep offer to beat the ravenous Murdoch. Eisner is also said to have worried about what impact owning a rival to cable TV would have on future dealings between the cable companies and Disney's cable channels.

BIDDING-WAR WORRIES. The same concerns doomed a longer look that General Electric took at DirecTV. You could almost hear GM execs licking their chops at the notion of having GE stock in their portfolio. NBC's parent company's stock has been hot for much of the past decade, and GE is considered among the best-managed companies in the country. But GE was also worried about bidding wars. And it was concerned about the high cost of increasing DirecTV's subscriber base, which is expensive and often requires cut-rate deals and lots of advertising.

Lately, Hughes has been said to be dickering with Vivendi and Viacom. Vivendi has made no secret of its intent to find better ways to distribute the movies and music that it acquired last year with its $32 billion merger with Seagram's Universal unit. The company already has 14 million pay-channel subscribers in Europe and is building a wireless network overseas. And earlier this year, Vivendi Universal CEO Jean-Marie Messier boasted to reporters that his company "had the strongest balance sheet in the media industry" and that it was "now strong enough" to think of buying something major. He ruled out buying Hughes at the time, but those close to Vivendi say Messier is now rethinking some sort of a joint venture with Hughes.

Viacom sources, meanwhile, say the parent company of Paramount Pictures, MTV, and the CBS Network has also cooled on initial interest in buying DirecTV. I'm told that Viacom Chairman Sumner Redstone and CEO Mel Karmazin are both worried about any deal that would dilute shareholder stock, and this deal would do just that.

SATELITTE IPO? In the end, I'm willing to bet GM will get stuck trying to find a way to make the deal with Murdoch. In mid-January, there were indications that News Corp. was getting ready to launch the much-talked-about and once-delayed initial public offering of its varied satellite holdings. Those holdings include News Corp.'s 40%-owned British Sky Broadcasting service, its Asian-based Star TV, as well as assorted stakes in Latin America and Australia. Put together into what is now called Sky Global Networks, analysts figure the assets would be valued at $35 billion. Murdoch would likely raise something north of $4 billion from the IPO, about half of which he would have to give to Haim Saban, his partner in the Fox Kids cable channel. Saban has excercised an option to have Murdoch buy him out.

That will likely set the stage for the eventual purchase of DirecTV by News Corp., which will probably be announced in the last week of January. The deal will be part cash, part stock in Sky Global. And GM, for all its efforts to find an outside buyer, will still find itself appended to Rupert Murdoch. Grover follows the ever-entertaining ways of Hollywood as Los Angeles Bureau Chief for BusinessWeek. Read his Power Lunch column, only on BW Online


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