EchoStar has agreed to pay Hughes Electronics Corp. $600 million in cash as part of a settlement to immediately terminate the proposed merger between the nation’s two largest satellite television providers. The companies dropped the merger because of opposition by the Department of Justice (DOJ) and the Federal Communications Commission (FCC).
As a result of the merger termination, the Littleton, Colo.-based EchoStar will take an approximate $700 million write off in the fourth quarter for the merger breakup fee and other related merger expenses. Hughes will retain its 81 percent ownership position in PanAmSat .
In October of last year, EchoStar reached an agreement then valued at $26 billion with Hughes’ parent company, General Motors, to buy Hughes in a deal that would have created the nation’s largest pay-television service with more than 16.7 million subscribers and control of between 80-90 percent of the DBS market. Both companies have experienced significant subscriber growth in the last several years and they control the only orbital slots allocated for direct broadcast satellite service that cover the entire continental United States.
Critics of the deal, which included spurned Hughes suitor News Corp., said the merger would create a satellite television monopoly by combing the nation’s number one and two DBS operators.
Echostar and Hughes contend the promise of offering broadband and advanced digital media services to underserved rural markets, at potentially lower costs, would have presented serious competition to cable and regional bell companies’ ambitions to offer broadband and digital media entertainment to their subscribers, arguments rejected by both the DOJ and the FCC.
“We continue to believe that the proposed merger would have been a victory for consumers nationwide, and for our shareholders. We worked hard on it to get the required regulatory approval and are disappointed that we were not able to complete the merger,” said Hughes President and CEO Jack A. Shaw. “However, since the merger couldn’t be completed, we concluded that this settlement is the best alternative for Hughes and places us in the best position to move ahead with our business.”
In its announcement to block the merger, The DOJ said in late October if the merger were allowed to proceed, it would eliminate competition between the nation’s two most significant direct broadcast satellite services and would substantially reduce competition in the multi-channel video programming distribution business to the detriment of consumers.
Earlier in October, the FCC said that the companies did not demonstrate that the merger would serve the public interest.
“The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly,” FCC Chairman Michael Powell said in rejecting the merger. “The case against approving the (deal) is particularly compelling with respect to residents of rural America who are not served by any cable operator. Those Americans would be left with only one choice for their subscription video service, now and in the foreseeable future.”
The FCC ruled the combination of EchoStar and Hughes would eliminate existing facilities-based intramodal competition and replace it with a proposed “national pricing” plan, which would have to be enforced by regulatory authorities.
“We are appreciative of all the support we received and the opportunity to present the merger proposal to regulators. Obviously, we are disappointed in the final outcome. However, EchoStar will continue to seek alternative, innovative ways to provide competition to the rapidly consolidating cable industry and to provide more choices for all consumers,” said EchoStar Chairman and CEO Charles Ergen.
