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Technology Stocks : Hughes Electronics (GMH)

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To: Paul Senior who wrote (267)2/8/2003 10:29:20 AM
From: Glenn Petersen  Read Replies (1) of 277
SBC Said to Be in Talks to Buy DirecTV

February 8, 2003


With its core local phone business in decline, SBC Communications has entered serious negotiations to acquire the DirecTV satellite television operation of General Motors in a deal that could be worth more than $10 billion, people close to the talks said yesterday.

SBC's interest in DirecTV, the nation's No. 2 pay television provider after Comcast, sets SBC in direct competition with the News Corporation, controlled by Rupert Murdoch. Mr. Murdoch has been pursuing DirecTV for at least three years as he tries to add the United States to his global satellite empire.

In 2001, General Motors appeared to dash Mr. Murdoch's hopes by agreeing to sell its Hughes Electronics division, which includes DirecTV, to EchoStar Communications, the second-biggest satellite television company after DirecTV. Antitrust authorities in Washington, however, rejected that deal last year.

Now, the News Corporation is back in talks with G.M. The conventional wisdom in the media and telecommunications industries had been that Mr. Murdoch would be the only serious bidder for Hughes and DirecTV, which has almost 11 million subscribers.

Mr. Murdoch, however, must now contend with SBC, the nation's No. 2 local phone company behind Verizon, and with SBC's wily chairman, Edward E. Whitacre Jr. Mr. Murdoch is a business legend, but Mr. Whitacre has also proved to be an aggressive deal maker. Since federal telecommunications laws were relaxed in 1996, SBC, formerly known as Southwestern Bell, has acquired two other regional Bell companies, Pacific Telesis in the West and Ameritech in the Midwest.

While he has continued his negotiations with G.M., Mr. Murdoch has also discussed trying to acquire EchoStar, according to people close to those talks. People close to the News Corporation said yesterday, however, that Mr. Murdoch was leaning away from EchoStar. Those people added that the News Corporation was aware of SBC's negotiations with G.M.

There would not appear to be major antitrust or regulatory hurdles with a deal involving either SBC or the News Corporation.

Cablevision, the big cable television carrier, and General Electric have also expressed some interest in DirecTV, according to people close to the talks. Those people said that G.E. and Cablevision appeared to be significantly less serious than SBC and the News Corporation.

G.M. approached SBC at the beginning of the year, trying to bring in another bidder for Hughes to compete against Mr. Murdoch, people close to the talks said. SBC has been discussing a potential deal with G.M. since then, these people said, adding that SBC could soon begin a more intensive examination of the Hughes records and operations, a process known as due diligence.

One person close to G.M. said that its board had authorized the company's management on Tuesday to continue discussions with both the News Corporation and SBC.

"We have certainly been engaged in evaluating strategic options for Hughes," Toni Simonetti, a G.M. spokeswoman, said yesterday. "We're looking at a number of options, but we are not in a position to comment on anything specific at this time."

Spokesmen for SBC and the News Corporation declined to comment.

For SBC, a deal to acquire DirecTV would represent an audacious attempt to jump-start its prospects. SBC is one of the biggest and most powerful companies in the telecommunications industry, but its core local phone operation is struggling because of competition from cellphones, e-mail and the rise in high-speed Internet connections, which do not require the use of a normal phone line.

For the fourth quarter, SBC reported that its revenue shrank to $11.2 billion from $11.9 billion in the period a year earlier. The number of consumer phone lines served by SBC shrank by 9.1 percent last year, to 31.4 million.

Most of the local phone industry is in similar straits, and the sector's real specter — the cable television industry — has not even begun to haunt it in earnest.

Even as cable television providers focused in recent years on adding cable modem and digital television subscribers, they also signed up more than two million homes for local phone service. The cable companies appear poised to add millions more to that roster over the next few years.

Now that most cable companies have upgraded their networks with digital two-way technology, adding phone service does not represent a huge technical hurdle. (Most cable phone systems, however, shut down when electrical power is lost, while traditional phones generally continue to work in a blackout.)

Local phone companies, however, have had no way to counterattack the cable industry's bastion: television service. That is why DirecTV is attractive to SBC.

The regional Bell companies have tried many times to expand into the television business. In 1993, Bell Atlantic tried to merge with Tele-Communications Inc., then one of the nation's biggest cable companies, but that deal fell apart amid pricing disagreements and regulatory uncertainties.

Then, in the mid-1990's, the Bell companies established two rival groups to try to develop technology that would allow them to distribute television signals. One group, which was known as Tele-TV and included Bell Atlantic, Nynex and Pacific Telesis, focused on digital wireless technology. The other, which was known as Americast and included Ameritech, BellSouth and SBC, focused on fiber optic technology.

Both groups failed.

In recent years, various Bell companies including SBC have experimented with licensing agreements that would allow them to sell satellite television service, but all have seemed half-hearted. For SBC, an acquisition of DirecTV would be anything but.

People close to the talks said that SBC would prefer that G.M. separate DirecTV from the rest of Hughes so that SBC could buy only the television operation. G.M. is highly unlikely to agree to that idea, however.

Hughes, which trades as a G.M. tracking stock, now has a market value of about $9.4 billion. If the News Corporation or SBC were to acquire the entire unit, the price could easily surpass $10 billion.

It is possible, however, that the News Corporation or SBC could agree to buy only the 30 percent of Hughes that is owned by G.M.; the other 70 percent is owned by the public. In that case, the deal could be worth as little as $3 billion or $4 billion, though it would still transfer control of the unit to the acquiring company. According to people close to the talks, G.M. is insisting on cash for its stake. G.M. intends to use the money to help shore up its pension fund, among other potential uses, according to one person close to G.M.
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