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Murdoch's Plan to Ground Pegasus

By Ron Grover You don't pull on Superman's cape -- and you don't mess around with Rupert Murdoch. That's what the folks at satellite operator Pegasus Communications (PGTV) are no doubt thinking, now that Murdoch's 34%-owned DirecTV (DTV) has offered to buy Pegasus' 1.1 million subscribers for $675 apiece. The offer, a low-ball figure, is just the latest salvo in the war between the satellite operators -- one that Murdoch seems likely to win.

DirecTV tendered its offer on the heels of a June 2 deal with Pegasus affiliate National Rural Telecommunications Cooperative (NRTC) that will terminate Pegasus' ability to get DirecTV signals. The deal extends an existing agreement between DirecTV and NRTC through 2011 -- but excludes Pegasus. DirecTV's contract to provide TV service to Pegasus will end on Aug. 31, 2004.

Not surprisingly, Pegasus reacted angrily to the news, responding that it "intend[ed] to vigorously protect our rights" against what it called "the strong-arm tactics" and "the very strong desire of take value away from our stakeholders."

After the markets closed on June 2, Pegasus said that its three TV and satellite subsidiaries had filed for Chapter 11 protection "in order to prevent the National Rural Telecommunications Cooperative and DirecTV from seeking to implement an unlawful termination" of Pegasus' contract to distribute DirecTV's TV satellite TV service. Pegasus also said that it would use the bankruptcy court to seek damages resulting from the just-announced deal between NRTC and DirecTV.

LOSING ALTITUDE. DirecTV and Pegasus have been duking it out since 1999, four years before Murdoch acquired a controlling stake in DirecTV. In 1999, NRTC alleged that DirecTV violated its contract by failing to provide premium movie services and by not paying fees that it owed to NRTC. Pegasus filed a similar suit in 2000, and DirecTV countersued a year later, alleging that it hadn't received money it was owed for new subscribers under a joint marketing arrangement it had with Pegasus.

DirecTV has since settled with NRTC. Meanwhile, a federal judge dismissed Pegasus' claim, and a jury awarded DirecTV $51.5 million in its suit over the marketing deal. (Pegasus is contesting a $12.6 million increase in that award to cover interest.) In its recent filing, Pegasus said its satellite subsidiary didn't have the money to cover the award and that it was looking into ways to pay it.

Even without the hefty judgement hanging over it, Pegasus would be hard-pressed to wage a strong battle against DirecTV. Pegasus lost $67 million in its first quarter, on revenues of $205.1 million, and says that its debt was downgraded from CCC+ to CCC on Apr. 26, shortly after the jury award against it. In its most recent quarter, subscriber numbers fell by 41,685.

"FAIR AND REASONABLE"? After rising on the strength of hopes that Murdoch would buy the company, Pegasus's shares have fallen from $46.65 in January to $15.50 on June 2. Now, it must decide by Aug. 31 whether to accept DirecTV's offer, which Pegasus says came without prior notification.

"While neither the NRTC nor DirecTV has an obligation to Pegasus on account of the termination of its contracts, DirecTV has extended an offer that we believe is fair and reasonable," Steve Cox, DirecTV's executive vice-president of sales, said in a statement.

Pardon the folks at Pegasus if they see it a little differently. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

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