By Ron Grover As a younger guy, Charlie Ergen was a heck of a poker player, putting down big bets even when it looked like he had a losing hand. That same bravado has served him well in business. This is the man, after all, who used junk bonds to build EchoStar Communications (DISH) into a major satellite-TV operator and who outmaneuvered Rupert Murdoch last October for the rights to merge EchoStar's Dish Network with General Motors' (GM) DirecTV.
Alas, Lady Luck may no longer be favoring Ergen. It looks like the DirecTV deal is in serious trouble, as word filters out from Washington that both the Federal Communications Commission and the Justice Dept. may reject the merger on antitrust grounds. Both agencies are concerned that a combination of the country's two largest satellite operators would leave consumers with only a satellite giant and a local cable company to choose between for TV service. A decision is expected sometime in November.
A thumbs-down would be just the beginning of trouble for Ergen and his Littleton (Colo.) outfit. If the deal does fall through, Ergen could find himself anteing up the biggest pot of his life: The total ding could be $3.3 billion, making it the most expensive business bluff ever.
TOUGH TERMS. While the numbers are eye-popping, they're exactly what Ergen agreed to when he made the deal. Check the fine print of the merger agreement between EchoStar and Hughes Electronics, the GM unit that owns DirecTV. EchoStar is required to pay $600 million "if either [EchoStar] or Hughes terminates the merger agreement as a result of a permanent injunction of final and nonappealable order prohibiting the merger in an action brought by a U.S. federal, state, or local authority under the U.S. antitrust laws or FCC regulations."
On top of that, the merger agreement says even if the deal tanks, Ergen has agreed to purchase the 81% stake in satellite-service company PanAmSat that's now held by DirecTV parent Hughes Electronics. That agreement's cost is a cool $2.7 billion.
With so much at stake, you have to ask why Ergen handed GM such a potential jackpot in the first place. Answer: It was the only way he could get the deal done. When he first approached GM last year, Ergen's bid to merge the two satellite services was severely underfunded. At one point, he was forced to pledge his own stake in the company to get a loan for part of the downpayment.
STILL PLUGGING AWAY. And gambler that he is, Ergen figured he would never have to pay the $3.3 billion. For cash-hungry GM, the break-up fees no doubt looked like insurance. And they still must look pretty good. Turns out that $3.3 billion is just about the amount of debt that Hughes carries on its books.
No one is talking about the break-up fee right now, with executives at both EchoStar and Hughes saying they're still plugging away to make the merger happen. "We remain focused on the deal," says Hughes spokesman George Jamison. "We believe the facts are strong and compelling, and the deal should be approved."
EchoStar executives second that. Spokesman Marc Lumpkin adds that the deal is the only way consumers will have a viable alternative to cable if the feds approve the pending merger between cable giants Comcast (CMCSA) and AT&T (T). According to EchoStar's Lumpkin, the added frequencies EchoStar would get by merging the two services would allow it to offer consumers more channels, local TV stations, and, eventually, data services.
TOO MUCH OPPOSITION? Lumpkin also says Ergen has recently met with the FCC Chairman Michael Powell, while Hughes sources say lawyers for both companies have met with Justice Dept. attorneys to find a way to keep the deal alive. EchoStar is willing to make concessions, including one that would guarantee that the same price offered is offered to rural customers -- the market that regulators fear would get hammered because of lack of competition -- that's offered elsewhere.
Even so, it looks like this is a dead deal, with everyone from consumer groups to state attorneys general lined up against it. But that doesn't mean Ergen is going to reach for his checkbook anytime soon. Indeed, he has made litigation something of an art form, suing or defending himself with a special gusto. When the four major TV networks wouldn't allow him to carry their signal to some of his customers, he sued all the way to the Supreme Court. And earlier this year, he won a major case against Gemstar-TV Guide (GMST), which had sued to stop Charlie from using set-top boxes without paying Gemstar the hefty royalties it charges cable-TV companies for those on-screen program guides.
EchoStar officials say most of the time Ergen sues to get the best deal for consumers. And that may be. But there's no denying that the man knows his way around a courthouse. And the best odds you're ever going to get are that he'll go to court to find some way out of paying that breakup fee if his DirecTV deal tanks.
THROUGH THE CRACKS? How can he wiggle loose? His lawyers are scrappy, and they'll likely find a crevice in the legal language that they can squeeze a case through. Ergen would most likely contend that Hughes "did not use its best efforts" to push the deal past regulators. That potential legal "out" was part of the merger agreement, GM said in a Sept. 30 filing with the Securities & Exchange Commission, although the auto company says Ergen would still be required to pay half the $600 million.
If the deal falls through, you can expect Hughes to start fortifying its already formidable legal defenses. "It will be General Motors' army of lawyers vs. the small but hardy group of lawyers that Charlie will set loose," says one source close to the deal.
And that makes the coming decision by the FCC and Justice Dept. all the more interesting. The agencies are likely to complete their review in the next few weeks. The buzz is that Murdoch, expecting the deal to tank, is preparing another bid. But I'm guessing that Ergen still may have a card or two up his sleeve. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online