EchoStar Finally Drops Merger With DirecTV

EchoStar Communications Corp. finally agreed Tuesday to abandon its proposed $18-billion acquisition of Hughes Electronics Corp., the owner of satellite TV giant DirecTV. But EchoStar will end up paying its El Segundo-based rival only a fraction of a previously negotiated penalty for backing out of the deal.

Under a settlement with Hughes’ parent, General Motors Corp., EchoStar has paid the full $600-million breakup penalty, but it will avoid having to spend $2.7 billion, as called for under the original merger agreement, to purchase Hughes’ controlling stake in PanAmSat, a commercial satellite service.

The settlement may clear the path for a sale of Hughes to News Corp., the entertainment giant controlled by Rupert Murdoch that lost a bidding war to EchoStar a year ago. Murdoch called Hughes executives Tuesday requesting a meeting with GM in the next two weeks. Murdoch has said he would be interested in purchasing GM’s 30% controlling stake of Hughes.

Separately, executives of Liberty Media Corp., the cable programming company controlled by billionaire John Malone, told investors at a New York conference Tuesday that the company was interested in buying DirecTV with or without Murdoch.

Jack Shaw, the chief executive of Hughes, said Tuesday that the company had not had conversations with any potential buyers since signing the merger agreement last year with EchoStar. But he added that potential suitors in addition to Malone and Murdoch had expressed interest in Hughes through friendly third parties.

GM still needs to sell Hughes to finance the automaker’s pension liabilities. Shaw dismissed as “impractical” the idea that Hughes would be bought in a management-led buyout backed by financial investors.

The EchoStar settlement perplexed many Hughes investors, who questioned why GM would free EchoStar of its contractual obligations at such a modest cost.

Shaw, however, said that settling with EchoStar was a better alternative than tying up Hughes in court for several years litigating a dispute between the parties over the breakup fees. “Litigation like this can go on for two to three years,” he said, “and can get to three to four years.”

Hughes executives said the company also wanted to avoid spending another year waiting for regulatory approval for EchoStar’s purchase of PanAmSat, especially if the two parties were locked in a court battle.

Shaw refused to comment on whether EchoStar had threatened to file a lawsuit contesting the merger contract.

EchoStar will take a $700-million write-off in the fourth quarter to cover the breakup fee and related merger expenses.

The settlement comes two months after federal regulators nixed the merger of EchoStar and Hughes as anti-competitive. The deal would have combined the nation’s only two satellite providers, leaving some rural communities not wired for cable with only one alternative for pay television service.

EchoStar’s stock reacted positively to the news, jumping $2.04 a share, to $21.09 on Nasdaq. Hughes closed at $11.05, down 25 cents, while PanAmSat shares dropped $4.05, to $15.01. Analysts said EchoStar’s conditional agreement to buy Hughes’s 81% interest in PanAmSat for $22.47 a share was keeping the stock price artificially inflated.