The End for Murdoch's DirecTV Show?


By Jane Black When Charlie Ergen, the maverick CEO of satellite-TV provider EchoStar, made an unsolicited bid for DirecTV in August, many analysts discounted it as a ploy for attention and a way to delay an inevitable takeover by Rupert Murdoch's News Corp. Others said it was a ploy to distract DirecTV's management and let EchoStar gain market share (see BW Online, 8/10/01, "Murdoch's Problem with Charlie Ergen").

Some ploy. On Oct. 27, Ergen proved them all wrong. After General Motors, DirecTV's owners, again extended the deadline for Ergen to arrange financing, Murdoch made good on a threat to walk away from his 18-month negotiation to buy the satellite-TV unit. His exit handed EchoStar the DirecTV prize for a cool $23.65 billion -- although antitrust issues loom large.

Analysts are calling EchoStar's (DISH) successful bid for DirecTV (GMH) one of the biggest upsets in media history. And not surprisingly, investors are punishing News Corp. (NWS) for Murdoch's decision to bolt. Since Oct. 29, News Corp.'s stock has fallen almost 7%, to $25 a share. But speculation that Ergen's win aids the demise of News Corp.'s global strategy is overblown.

CONTENT POWERHOUSE.If antitrust concerns kill the deal -- a real possibility -- Murdoch could get another swipe at DirecTV, possibly at a lower price. Industry analyst Precursor Group estimates the EchoStar-DirecTV merger has just a 35% chance of success. Moreover, with or without DirecTV, News Corp. remains one of the largest entertainment companies in the world, with powerful film studios cranking out content for a variety of broadcast, cable, and satellite channels across the U.S., Europe, and Asia.

News Corp. has two primary growth drivers: the filmed-entertainment division and synergies from the acquisition in 2000 of the Chris Craft network of broadcast stations. The former includes film production and distribution. Several top-rated shows, including Buffy, King of the Hill, The Practice, and Ally McBeal, are ripe for syndication. Over the next six years, these shows will net News Corp. $1.2 billion to $1.8 billion in profits, according to company projections.

In the near-term, the division also expects to see huge upside from a string of successful summer films, including Planet of the Apes, Moulin Rouge, and Dr. Doolittle 2. Together, they brought in $656 million in worldwide box-office receipts, according to Variety. These revenues will be recognized in News Corp.'s fiscal first-quarter results, to be announced on Nov. 7. The numbers are expected to be decent, although the company does not give guidance and a spokesman declined to comment on future earnings.

REBOUND DUE. For fiscal year 2001, ended June 30, News Corp. reported $13.8 billion in consolidated revenues and operating income of about $1.7 billion. Few analysts are predicting exactly when the stock might rebound, but 12-month share-price targets range from $33 to $39. "Disney has been quite successful without distribution. So has Viacom. It's nice to have both but not essential to future growth," says Peter Shorthouse, a Sydney-based analyst with ABN Amro.

News Corp. expects to garner substantial savings from its $5.35 billion acquisition of Chris Craft and subsidiaries. The deal, which was finally approved in June, gives News Corp. 33 broadcast stations that reach more than 40% of U.S. viewers. More important, it handed Murdoch & Co. stations in the two largest U.S. markets -- New York and Los Angeles -- as well as double-hitters in Dallas, Houston, Minneapolis, Phoenix, and Washington, D.C.

The so-called "duopoly" strategy will add to earnings quickly because it allows News Corp. to slash costs by combining operations and doubling advertising revenues. The Chris Craft stations now produce a 35% operating margin. Analysts expect News Corp. to lift those to its standard 45%, much as it did with its 1997 acquisition of New World Communications, in which efficiencies raised margins from 27% to 47%.

"A BETTER PRICE."Meanwhile, it's possible, even plausible, that Murdoch will end up with DirecTV after all. Among EchoStar's substantial regulatory concerns: It would eliminate competition for 9 million rural subscribers who don't have access to cable. Precursor Group warns that the deal could also discourage new entrants to the market and reduce incentive for innovation. And financial analysts agree, despite EchoStar/DirecTV's assertions to the contrary. "It's very likely that one way or another, Murdoch will end up with DirecTV. By waiting it out, he may even get a better price," says Peter Mirsky, a media analyst at S.G. Cowen.

Even if the EchoStar deal falls through, GM still stands to profit. EchoStar agreed to buy satellite-service provider PanAmSat Corp. for $5 billion -- a move that assures GM much-needed cash (since GM's Hughes Electronics unit owns 81% of PanAmSat) to bolster its balance sheet, even if the DirecTV deal is shot down on regulatory grounds.

Still, a deal, even a year from now, would be sweet for Murdoch & Co. News Corp. didn't spend 18 months fighting for an insignificant prize. With his own distribution platform, Murdoch could play hardball with cable operators such as AOL Time Warner, withholding popular programming in exchange for distribution of new shows or higher fees.

BSkyB MODEL. Murdoch could also increase DirecTV's subscriber roles by offering "must-see" programming, which he would pay for by spreading costs across his global satellite network or by driving down the cost of set-top boxes, which he could buy in bulk.

That strategy has already proved itself with Britain's BSkyB (BSY.L). Over the past 10 years, the satellite service has grown from nothing to more than 5 million paying subscribers by shelling out big bucks for popular sporting events, such as matches featuring Britain's National Soccer League, and broadcasting popular American shows such as The Simpsons.

News Corp., like other media behemoths, surely faces hard times in the year ahead. Advertising revenues have plummeted and aren't expected to rebound anytime soon. In his latest report in June (long before September 11's disasters), ad guru Robert Coen of Universal McCann had already lowered his ad-growth forecasts for 2001 to a puny 2.5%, which would bring total spending in all media to $249.8 billion. That's less than half the 5.8% growth rate forecast in December, 2000.

"RENEWED VIGOR." News Corp. also lacks a cohesive Internet strategy. While that may have seemed smart when the dot-com bubble burst, analysts say Murdoch needs one now -- and fast. "The DirecTV deal was all about distribution. The Internet is one of the most powerful distribution mechanisms around, and News Corp. has no strategy," says one entertainment consultant.

These are tough challenges. But without the distraction of the DirecTV negotiation, Murdoch & Co. will have a lot more time and energy to focus on them. "With this saga finally concluded, we will return with renewed vigor and sharpened focus to maximizing our worldwide media business," Murdoch said in a company statement. And doing just that may earn a nice return for long-term investors, with or without DirecTV. Black covers technology and media for BusinessWeek Online in New York


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