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Disney, News Corp. Vying for Hughes Stake

The prospect of an AOL divestiture has these media giants licking their chops.

The potential America Online (AOL) merger with Time Warner (TWX) was supposed to spell the beginning of the end for so-called old media.

But it now appears increasingly likely that if the deal goes through it will pave the way for at least one old-media monster, probably

News Corp.



Walt Disney


, to stake out a leading role in the digital future.

The key to this transformation lies with

Hughes Electronics


, the

General Motors


unit that owns the biggest satellite television company in the U.S.,



Talks between federal regulators and AOL/Time Warner have stirred rumors that the feds want AOL to divest itself of its 5% stake in Hughes. News Corp. and Disney are both seen as possible bidders for Hughes.

A Hughes deal would give either company a huge advantage in distributing its valuable content, an area whose importance will only grow when AOL and Time Warner finally hook up. Accordingly, a deal could boost the stock of these companies, which have lagged behind the broader market in recent years.

Icahnic Moves

Conveniently, the push for AOL to lose Hughes comes as Carl Icahn, the veteran corporate raider who has made a career of making management miserable, has begun agitating for GM to sell off its 33% stake in Hughes. The conventional wisdom is that GM stock is undervalued in light of the rising value of its Hughes stake.

Icahn's maneuvering has intensified the drumbeat on Wall Street, and GM has recently acknowledged that it is considering an outright sale or merger of Hughes, as well as partnerships and joint ventures with other companies. GM has said that it is exploring three types of strategic partnerships for Hughes: a direct broadcast partner, a content provider partner or an Internet partner. The company has said it wants to make a decision about Hughes in coming months.

The sudden availability of both GM's stake and AOL's $1.5 billion stake could lead either News Corp. or Disney to try to acquire both.

In another bit of kismet, News Corp. is prepping the initial public offering for

Sky Global Networks

, which will house the company's sizable satellite holdings. Industry observers expect the company to sell off 10% to 15% of Sky, an offering that will likely raise $25 billion to $30 billion. The IPO could come as soon as October (in documents filed with the

Securities and Exchange Commission

earlier this year, News Corp.

said it planned to take Sky public by the end this year).

Why would Rupert Murdoch want to add DirecTV to his Sky Global Networks? Because it would add a U.S.-based distribution platform to his satellite holdings, which include U.K. satellite provider

British Sky Broadcasting


, Britain's No. 1 pay-TV provider, as well as its stakes in Italy's


and Asia's

Star TV

, among others. A U.S. satellite presence has eluded Murdoch for years, and DirecTV must make his mouth water. In fact, earlier this year, reports emerged that Murdoch was mulling a strip-it-for-parts bid to buy GM just to get his hands on DirecTV and sell off the motors part of General Motors, reports the company emphatically denied.

"I think News Corp. buying it is a real possibility," says hedge fund manager Hal Vogel. "But not immediately. It might have to wait until after the IPO and there is some seasoning of the Sky Global equity, to see how the market values it and to give News Corp. a currency to trade for GM Hughes."

News Corp. said earlier this year that it was forming Sky Global in part to create a currency with which to do deals, but the company isn't talking when it comes to any attempts to snag Hughes. "We never comment on rumors and speculation," said company spokesman Andrew Butcher.


Disney, meanwhile, could emerge as News Corp.'s main rival to acquire DirecTV, says Vogel. In the six degrees of separation that is the media world, Disney has become increasingly restive since its

fight with, yes, Time Warner's cable unit resulted in the ABC networks being taken off the air during the critical sweeps period earlier this year. That dispute revealed Disney's vulnerability to the whims of the companies, like Time Warner, that control cable distribution.

Since May, Disney has taken the lead in lobbying regulators either to block the AOL/Time Warner merger or to impose restrictions so that the merged entity would have less control over distribution of content, and the regulators do appear to be listening. More recently, reports emerged that the

Federal Trade Commission

could force AOL/Time Warner to open its cable lines to provide broadband Web access to competitors.

Acquiring DirecTV, which claims nearly 9 million subscribers and is growing rapidly, could further insulate Disney, at least in part, against another attempt to cut off its distribution. Plus, Disney Chief Executive Michael Eisner "sees Rupe as a major rival," says Vogel. A Disney spokeswoman declined to comment on "speculation."

It is unclear whether Disney stock, which has been trading in the 30s and low 40s for much of the last year, would be attractive to GM. The mystery that is Sky Global, which has several big-name cheerleaders on Wall Street, could induce GM to wait and see what that stock does once it hits the market.

Still, any deal is probably months away: Until Sky Global goes public, News Corp. doesn't have the currency to really begin talks. GM has also got to figure out how to overcome the tax liabilities of such a huge deal. Its 33% stake could fetch as much as $17 billion, according to one analyst's estimate, so selling Hughes would create a stumbling block in its own right.