EchoStar’s Plans for Bond Sale Fuel Merger Rumors

EchoStar Communications Corp. may be building a war chest to make a bid for its bigger satellite television competitor, Hughes Electronics Corp., the owner of DirecTV.

EchoStar announced plans late Tuesday to sell $1 billion in bonds for acquisitions, investments and launching satellites, setting off a wave of speculation on Wall Street that the company chief executive, Charles Ergen, is gearing up to spoil plans by News Corp. to take control of Hughes.

For the last six months, News Corp. has been negotiating to buy out the 32% controlling stake in Hughes held by General Motors Corp. Sources say News Corp. and General Motors have finished the due diligence on the deal and are negotiating the fine print of the contract.

Sources close to News Corp. say Ergen is simply stirring up trouble and trying to disrupt a merger that would put EchoStar’s biggest competitor in more aggressive hands. Both EchoStar and the cable industry are worried that News Corp. Chairman Rupert Murdoch will use his worldwide satellite clout and in-house entertainment and sports programming assets to make DirecTV more attractive to customers.

Adding fuel to the EchoStar speculation, Murdoch vented his frustration last week at the slow pace of the Hughes negotiations, telling CNBC there was only a 50-50 chance that he would complete the deal. That followed optimism within News Corp. when GM earlier in the month acknowledged for the first time that it was negotiating exclusively with News Corp. Yet in private meetings with investors Wednesday in New York, Ergen said he would not interfere with News Corp.’s negotiations with GM and would only make a bid at the invitation of the auto maker.

In a securities filing last fall, EchoStar indicated that it was exploring the possibility of making a bid for Hughes, and Ergen said earlier this month that his company was capable of doing so.

Sources say Hughes shareholders, which include some of the nation’s largest money management funds, are pushing Ergen to make a bid because they are unhappy with the small premium they would get for their shares under News Corp.’s proposal. But many Wall Street investors have their doubts.

Added to the $1.3 billion EchoStar has in cash, the $1-billion bond sale still leaves a huge gap in the company’s ability to buy GM’s stake, which has a market value of nearly $10 billion. GM is demanding that $6 billion of the purchase price be in cash.

Analysts say Ergen could use the $2.7 billion in cash Hughes has on its books, but would still need a strategic partner.

One logical partner could be Vivendi Universal, the French water and entertainment conglomerate that already is the largest pay television provider in Europe. Sources say Vivendi officials met with EchoStar executives within the last six months to explore possible alliances. Vivendi is said to be looking for a U.S. outlet for its film and other entertainment products, and to broaden the market for its set-top control-box technology.

Still, there are questions about whether even the deregulation-minded Bush administration would allow the nation’s only two satellite providers to combine.

Wall Street proponents say the combination of DirecTV and EchoStar would create a company with 15 million subscribers that would be a stronger rival to cable system operators. The leading cable provider, AT&T; Corp., has about 15 million subscribers.

Ergen has a reputation as a deal spoiler. He tried to block DirecTV’s purchase several years ago of PrimeStar, a satellite provider owned by a consortium of cable operators, by buying up the company’s bonds before the purchase closed. He was unsuccessful, however, in accumulating enough of them to stop the deal.