Updated from 12:51 p.m.
is going country, and other players in the satellite broadcast business aren't going to like it.
DirecTV, the nation's largest provider of home satellite TV service, said Wednesday it had agreed to dissolve a decade-old arrangement under which the National Rural Telecommunications Cooperative had the exclusive right to distribute the service in rural areas of the U.S.
The deal represents DirecTV's latest effort to breathe new life into the satellite business, following last year's deal in which Rupert Murdoch's
took a controlling stake in DirecTV.
At the same time, DirecTV's move almost certainly means further pain for shareholders of distributor
Pegasus Satellite Television
, whose shares have lost more than half their value since the company's
last scrape with DirecTV. DirecTV's new push could also shake up archrival
, analysts say.
But the announcement represents, by far, the biggest blow to Pegasus, an NRTC affiliate that is the largest DirecTV distributor under the NRTC-DirecTV agreement. Pegasus stock zoomed to $51 earlier this year on investors' hopes that DirecTV's new management would buy out the company -- hopes that were
cruelly dashed this winter.
In the afternoon, Pegasus shot back at DirecTV. "We categorically reject DirecTV's and NRTC's assertion that they can terminate our agreements, and intend to vigorously protect our rights," Pegasus President Ted Lodge said in a statement Wednesday. "We believe the strong arm tactics demonstrated by these actions today further evidence both the true value of our assets and the very strong desire of DirecTV and NRTC to take value away from our stakeholders."
Trading in Pegasus shares was halted Wednesday pending release of material news; the stock closed at $15.43 Tuesday, down 79 cents.
DirecTV's shares fell 12 cents Wednesday to trade at $17.38. EchoStar's shares fell 34 cents to trade at $31.37.
DirecTV -- which had a rocky relationship with the NRTC and Pegasus even before DirecTV's new management came in -- has blamed the old distribution agreement for stifling DirecTV's growth in rural areas.
"We have seen the number of subscribers to DirecTV services in territories covered by the NRTC agreement steadily decline -- primarily in Pegasus territories -- in the last few years," DirecTV Executive Vice President Steve Cox said in a statement Wednesday. "We believe the termination of the old distribution arrangement will allow DirecTV and NRTC to reverse this trend and compete more effectively in rural America."
The new arrangement, says a DirecTV spokesman, will enable the company to make the same offers to customers in current NRTC territories as it does elsewhere, covering such elements of service as pricing and hardware packages.
DirecTV has 1.5 million subscribers in the NRTC territories, which cover 9 million households across the U.S., according to Vintage Research analyst William Kidd.
Outside of the NRTC territories, DirecTV is showing sharp growth; the company added 460,000 of what it calls "owned-and-operated" subscribers in the first quarter, bringing that total to 11.14 million subs.
The move could be bad news for EchoStar, Kidd wrote in a note Wednesday morning, since the NRTC territories "had been a virtually uncontested source of growth" for EchoStar. Kidd has a buy rating on DirecTV and a neutral rating on EchoStar.
In February, DirecTV said it had terminated a yearlong mediation process with Pegasus over a contractual dispute with the distributor. At the time, DirecTV CEO Chase Carey accused both Pegasus' management and its investors of
having an inflated sense of their company's value.
"With every day that passes, both Pegasus' significance to DirecTV and its value as a standalone enterprise diminish," Carey said in a statement.
Pegasus's shares dropped 32% the following day, to $28.30.
Paying the Freight
In return for giving up its exclusive rights, the NRTC will receive a monthly payment of $4.4 million from DirecTV through June 2011, according to the DirecTV spokesman. The NRTC will also receive a payment based on the number of NRTC DirecTV subscribers that are transferred to DirecTV.
NRTC members who are retailers of the DirecTV service -- but not Pegasus -- will be able to preserve exclusivity in their territories through June 2011, says DirecTV. These affiliates will also have the option of transferring their subscribers to DirecTV, says the spokesman, in return for a payment of either $875 or $1,050 per customer, based on different formulas.
DirecTV says it will pay Pegasus $675 per subscriber, if the distributor -- which rejected a prior litigation settlement agreed to by other NRTC members -- agrees to transfer its subscribers back to DirecTV before the end of August.
In its latest quarter, DirecTV reported an average acquisition cost of $645 per subscriber, up from $545 one year earlier.