The New York Times The New York Times Business April 10, 2003  

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Murdoch Adds to Empire With Control of DirecTV

By ANDREW ROSS SORKIN

Completing the final piece in Rupert Murdoch's global satellite empire, the News Corporation agreed yesterday to buy control of Hughes Electronics and its DirecTV satellite operation from General Motors in a deal valued at $6.6 billion.

The deal will give Mr. Murdoch even more power in determining what programs are beamed to television sets across the United States and how much consumers pay for them.

With the addition of DirecTV, the nation's largest satellite operator with 11 million subscribers, the News Corporation will become one of only a few media companies in the nation, among them AOL Time Warner, that both create television programs and distribute them. The News Corporation owns the Fox Network and dozens of local affiliates as well as the increasingly powerful Fox News Channel and a clutch of heavily watched regional Fox Sports networks.

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Mr. Murdoch, the chairman and controlling shareholder of the News Corporation, is expected to start a pricing war with cable companies that could benefit consumers. His control of DirecTV will also give him substantial leverage to defend his programming business against pressure from a consolidating cable industry and, critics contend, possibly even squeeze his cable rivals by raising the prices they pay for his programs.

"We can help make satellite TV a viable competitor to cable," Mr. Murdoch said on a conference call last night. "More programming options, richer content and compelling new technologies will give satellite TV the best chance to break cable's hold on viewers."

The deal ends nearly three years of bidding wars, changing alliances and regulatory jockeying as Mr. Murdoch has sought to take over DirecTV in an effort to make the News Corporation the dominant television distributor in the world, with satellite operations serving more than 100 million households in the United States, Europe, Asia and Latin America.

"I've always felt for years that if you're in the content creation business, you must be somewhere in the distribution business to make sure you're not wasting your efforts and your money," Mr. Murdoch said on Fox News.

In 2001, Mr. Murdoch lost a bidding contest for control of Hughes to EchoStar Communications, the nation's second-largest satellite operator. That deal was rejected by regulators late last year after Mr. Murdoch waged a behind-the-scenes lobbying campaign — circulating a 123-page volume opposing the deal called "The Essential Guide to the EchoStar/DirecTV Deal" around Washington — to block the agreement, giving him a second chance.

Of course, the News Corporation's deal for Hughes will also require the approval of regulators, including the Justice Department and the Federal Communications Commission, and some consumer groups are already calling for this deal to be blocked as well. But unlike the deal with EchoStar, which would have combined the nation's two largest satellite television companies, legal experts suggest that the deal with the News Corporation will be approved because the company does not already compete in the satellite distribution business in the United States.

The News Corporation's offer for Hughes is significantly lower than the amount it offered in the 2001 bidding war — a deal worth about $22.5 billion — calling into question the decision by General Motors, which controlled Hughes, to accept EchoStar's offer when it knew the chances of that deal's being blocked were high. This time around, there was only one bidder.

Rick Wagoner Jr., chief exective of G.M., contended in a conference call yesterday that "the economic value is roughly the same" from this deal with the News Corporation, compared with its offer in 2001, but he declined to explain his math. A banker who worked on the transaction laughed when he heard of Mr. Wagoner's comments.

Under the terms of the deal, which must be approved by Hughes shareholders, the News Corporation would buy G.M.'s 19.9 percent stake in Hughes for $14 a share, or $3.8 billion. Of that amount, at least $3.1 billion would be paid in cash, with the rest in News Corporation publicly traded securities.

The company would then make a tender offer for 14.1 percent of the publicly traded Hughes shares for $14 a share in cash or News Corporation securities.

The price represents a 22 percent premium over Hughes's stock price, which closed yesterday at $11.48, down 2 cents, before the deal was formally announced. The shares, which trade as a G.M. tracking stock, edged up to $11.60 after hours. The News Corporation's American depository receipts ended regular trading down 66 cents, at $27.22. G.M. closed down 25 cents, at $34.48.

G.M. is planning to use the cash it receives from the deal to reduce its debt and strengthen its balance sheet.

The News Corporation would end up controlling 34 percent of Hughes, while the General Motors Pension Trust, which is separate from G.M., would continue to own 21 percent and the public would own the remaining 45 percent. Hughes will eventually be folded into the Fox Entertainment Group.

It is unclear what the effect of the deal will be on consumers, but some are crying foul.

"Hold on to your wallet," said Gene Kimmelman, co-director of the Consumers Union, a consumer advocacy group that supported the EchoStar-Hughes deal. "Prices will go through the roof."

Mr. Kimmelman said he was worried that the News Corporation would raise programming fees for cable operators by threatening to pull his networks off their systems, pushing cable prices for subscribers even higher.

"He has no incentive to price-compete against cable as long they pay a hefty fee for his programming," Mr. Kimmelman said.

The News Corporation disputes that contention and says that any price increases will have to be passed on to DirecTV as well, making higher programming prices less attractive.

"We have every intention of being a fair player," Mr. Murdoch said.

The News Corporation already owns satellite networks around the world, giving it considerably more influence when negotiating to buy satellite-receiving dishes, set-top boxes and other gear. That could enable DirecTV to substantially lower the average cost of acquiring each new customer, now estimated at more than $500 a household.

Mr. Murdoch also expects to expand the DirecTV subscriber base by aggressively marketing the service through his Fox TV outlets. And he will be able to eliminate Hughes's middleman status and reap the revenue directly each time a DirecTV viewer watches one of the News Corporation's 20th Century Fox films on pay per view.

Mr. Murdoch is hoping to repeat the success he has had with British Sky Broadcasting with DirecTV. He has turned BSkyB into the largest pay television operator in Britain by offering exclusive programming, like soccer matches, and has led the field in offering interactive services, like different camera angles for sporting events. It also offers programmable video recorders like the popular TiVo service.

G.M. said that Mr. Murdoch would become chairman of Hughes and that Chase Carey, the News Corporation's former co-chief operating officer, would be president and chief executive. Eddy Hartenstein, senior executive vice president of Hughes, will be vice chairman of Hughes.

An army of investment bankers and lawyers worked on the deal, many for more than three years. Indeed, half a dozen investment banks have worked on the transaction for little or no money because they are paid only after a deal is completed. Citigroup and J. P. Morgan Securities Inc. acted as financial advisers to the News Corporation, while Skadden, Arps, Slate, Meagher & Flom; Hogan & Hartson and Harris, Wiltshire & Grannis provided legal advice.

Merrill Lynch and Bear Stearns acted as financial advisers to G.M., and Jenner & Block; Kirkland & Ellis; and Richards, Layton & Finger provided legal advice.

Goldman Sachs and Credit Suisse First Boston acted as financial advisers to Hughes Electronics and Weil, Gotshal & Manges; Latham & Watkins; Wiley, Rein & Fielding; and Jones Day provided legal advice.






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Alan Levinson/Corbis
Rupert Murdoch put another jewel in his News Corporation crown with the purchase of the DirecTV satellite system.

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