Can Tci Launch Its Satellite Strategy?

Direct-broadcast hopes hinge on taking over Primestar

For a decade, Tele-Communications Inc. CEO John C. Malone relied on the dealmaking skills of mergers-and-acquisitions head Gary S. Howard to snap up cable systems across the U.S. That made TCI a giant. Now Malone is counting on the 45-year-old Howard to make TCI a player in satellite TV, too.

This could be the toughest deal yet for Howard, now president and CEO of TCI Satellite Entertainment Inc. The company's main asset is a 21% stake in the market-lagging Primestar system, which is owned in partnership with five other companies, including Time Warner Cable and General Electric. Howard's proposed deal: to put Primestar under one roof--his own. He is negotiating with the other owners to acquire the balance for $1.1 billion in cash, assumed debt, and TCI Sat stock. But the partners, reluctant to cede control, have been dragging their heels. Also, TCI Sat stock is off 50% from a peak of 19 last November when it began trading on a when-issued basis, before the operation was spun off to TCI shareholders. That alters the deal's math considerably.

If he gains control, Howard will tackle a bigger problem: getting Primestar, which already trails market leader DirecTV, into a higher orbit before the onslaught of Rupert Murdoch. Primestar has just 1.7 million subscribers compared with 2.5 million for DirecTV. Murdoch is now jumping in with a $1 billion investment by his News Corp. in EchoStar, which will relaunch as Sky--a system that will eventually have seven satellites and provide 500 channels of premium sports, movies, and local channels.

Part two of Howard's strategy is launching a second service called CablePlus. Unlike Primestar, which is geared to viewers who can't get cable TV, CablePlus is a supplement for cable subscribers--primarily the 20 million or so using systems with only 30 to 40 channels. Howard hopes cable companies will sell CablePlus to keep those customers from defecting to DirecTV or Sky.

Negotiations to unify Primestar under TCI Sat are expected to be completed by this summer, says Primestar CEO Jim Gray. Howard warns that "there are still a million miles of paperwork ahead of us." But the logic for merger is inescapable. Today, Primestar is a "multiheaded monster," says Washington satellite consultant Michael Alpert. Daniel O'Brien, head of Time Warner Inc.'s satellite unit, agrees: "There are many points of redundancy."

News Corp.'s satellite move could even be a plus for dealmaker Howard: The threat of Murdoch should encourage the Primestar partners to listen to TCI's plan.

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