Getting the Dish on Echostar-Hughes Deal Talk

Observers are split on whether a merger is in the cards.
By George Mannes ,

Seriouser and seriouser.

EchoStar Communications'

(DISH) - Get Report

bid for DirecTV parent

Hughes Communications

(GMH)

, once dismissed as merely a spoiler tactic aimed at Hughes suitor

News Corp.

(NWS) - Get Report

, appears to be gaining momentum, though onlookers are still violently split on its viability.

On Wednesday, an EchoStar spokeswoman confirmed that the judge overseeing an ongoing antitrust lawsuit between EchoStar and Hughes -- a sure wet blanket for merger negotiations -- had, at the parties' request, put the suit on hold for 60 days so the two sides could talk over a possible deal.

In addition, EchoStar is lining up $3 billion in short-term financing for a bid from

UBS Warburg

and

Morgan Stanley,

The Wall Street Journal

reported Wednesday. Add that money to the $1 billion EchoStar raised from a convertible note offering earlier this month, plus the $1.3 billion the company had on hand as of March 31, and EchoStar looks as if it's lining up the cash necessary to persuade Hughes' parent,

General Motors

(GM) - Get Report

, to part with the satellite television operator.

GM is said to want at least $5 billion in cash, but it's understood that price won't cover the whole company; GM will likely retain ownership of a certain amount of the successor satellite company's stock. Any deal is guaranteed to be complicated because of tax issues, observers say.

EchoStar declined to comment on the

Journal

report. A Hughes spokesman didn't immediately return a call for comment.

On Wednesday afternoon, Hughes rose $1.01 to $20.91. EchoStar fell 75 cents to $27.46.

Grains of Salt

One portfolio manager, speaking on condition of anonymity, said he didn't think EchoStar CEO Charlie Ergen would be able to pull off a deal. "The key is, does Ergen really have another partner? I don't think he does," the manager says.

But that hasn't kept him from being bullish on both EchoStar and Hughes. Starting Tuesday, the manager says he started buying shares in both stocks, which had been knocked down after

Hughes lowered forecasts for revenue and subscriber growth Monday night.

"A bad quarter doesn't change your strategic vision," the manager says, expressing incredulity that other investors would dump Hughes' stock on the basis of the preannouncement: "Two guys want the assets, so investors are puking it?"

Yet a hedge fund manager, also speaking anonymously, said he thought there would "definitely" be a deal between EchoStar and Hughes. The manager, who is long EchoStar and Hughes and is shorting several cable stocks, says he thinks much of the skepticism directed at EchoStar stems from investment bankers allied with cable TV companies because of the commissions cable deals are generating in otherwise lean times. "I think the investment banks are biased against EchoStar," says the manager.

An EchoStar-Hughes deal would be bad news for cable operators because the combined companies could eventually increase channel capacity, adding more local television stations to their product offerings, and be better positioned to win subscribers from cable operators. Satellite companies are on the brink of making a full-frontal assault on cable subscribers, says the manager, citing as one example Hughes' disclosure, in its recent earnings announcement, that it would start focusing its marketing on the 41 metropolitan areas where it could offer viewers local broadcast TV channels as part of its package.

Meanwhile, longtime satellite industry journalist Bob Scherman, editor and publisher of

Satellite Business News,

continues to insist that EchoStar's Ergen cannot mount a successful bid. "There's no chance he can pull it off," Scherman says. "There's no chance it will be approved by federal regulators."

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