Some Say EchoStar-DirecTV Deal Still Won't Fly

EchoStar Communications ( DISH) made another play at Hughes Electronics ( GMH) over Thanksgiving weekend. But analysts say the deal is as dead as a leftover turkey.

Rather than breathing any new life into the merger of the two direct broadcast satellite operators, the revised plan from EchoStar revealed Friday is intended only to help EchoStar avoid some costly consequences of the deal's expected official collapse in January, says one analyst.

Thus, the deal that both the Federal Communications Commission and the Justice Department came out against in October seems no closer to its unlikely approval. As EchoStar's Dish Network and Hughes' DirecTV continue on their separate paths, the biggest question facing the parent companies is how much it will cost them once the wedding is officially canceled.

In the latest plan, filed with the FCC last week, EchoStar expands on its previously disclosed proposal of helping cable TV operator Cablevision ( CVC) meet its long-standing corporate goal of launching a DBS service of its own. As part of the proposal, EchoStar says it will hand over to Cablevision various frequencies it controls for satellite broadcasting, grant Cablevision the right to resell its programming, and take other measures to help Cablevision's would-be DBS service.

In its filing, EchoStar says the measures it proposes will address regulatory concerns that the merger of EchoStar and Hughes will reduce competition in the multichannel television market comprising cable operators and DBS services.

But others aren't so sure the deal changes the long odds against the deal going through. "In my mind it actually doesn't," says Ray Schleinkofer of Thomas Weisel Partners. (Schleinkofer has a buy on EchoStar; his firm hasn't done recent banking for the company.)

The FCC, when it declined to approve the EchoStar-Hughes merger, stated that Cablevision, whose first satellite has yet to launch, could not be counted as viable competition in the near future.

Scott Cleland, chief executive of the Precursor Group, an independent research firm, said the filing was meant only to indicate that EchoStar is still trying to save the deal. Though the legal details are murky, it appears that EchoStar might be compelled to buy Hughes' stake in satellite operator PanAmSat ( SPOT) and pay a breakup fee of as much as $600 million.

"It's kind of ridiculous," says Cleland. "The government is not going to approve this deal. They said, 'Double-heck no' already. They already said it couldn't beem fixed. This is all about EchoStar continuing 'best efforts' so they don't have to pay the full breakup fee or buy PanAmSat. This is a kabuki dance."

How much EchoStar will pay and for what will probably end up in the hands of attorneys once the January drop-dead date for the deal arrives. In its third-quarter conference call with analysts last month, EchoStar alluded to "certain circumstances" under which it wouldn't have to pay the breakup fee or buy the PanAmSat stake.

Schleinkofer, acknowledging that he isn't a lawyer, wrote in a November report that EchoStar might be able to wriggle out of all or part of the breakup fee, but it would be tougher to evade the PanAmSat purchase, which he estimated at $3.3 billion. Depending on how optimistic one is about PanAmSat's future, EchoStar could end up overpaying by about $1.85 per EchoStar share, said Schleinkofer.

Bob Scherman, editor and publisher of Satellite Business News and a longtime doubter of EchoStar's ability to pull off the merger, termed last week's filing by EchoStar and Hughes an "embarrassing" effort precipitated by the language in the deal's breakup fee.

On Monday afternoon, EchoStar's shares were up 34 cents to trade at $20.75, while Hughes' rose 15 cents to $11.83. Shares in Cablevision, whose interest in launching a satellite service has turned off investors already worried about the company's high level of debt, fell 19 cents to $16.72.

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