Murdoch's Satellite Dream Remains beyond His Reach

GM is sitting on his bid for Hughes and its DirecTV service

You have to give Rupert Murdoch credit for perseverance. Nearly 20 years after his first try to crack the U.S. satellite TV market, the 70-year-old chairman of News Corp. (NWS ) is still at it. He first tried in 1983. Then there was a failed partnership with Hughes Electronics Corp. and NBC back in 1990. He tried again in 1996 with his ill-fated ASkyB service, and a botched merger with Echostar Communications ended in acrimony and litigation.

This time Murdoch is taking on General Motors Corp. (GM ) For months, Murdoch has had a deal on the table to merge the GM-controlled DirecTV service, and its 10 million subscriber base, with News Corp.'s growing collection of satellite assets in Europe, Asia, and Latin America, called Sky Global Networks Inc. DirecTV is operated by Hughes Electronics, which is 30% owned by GM. The deal would create a $70 billion satellite colossus, the first truly worldwide TV distribution company. But Murdoch's agreement in recent days appears on the verge of collapse as GM tries to shop a better deal.

Murdoch isn't giving up. On March 13, say sources close to the deal, he sent a letter requesting a meeting with GM board members, effectively going over the heads of Hughes executives who have quietly been bottling up his bid. "He wants one last drive to the goal line," says Robert H. Lyon, president of Institutional Capital Corp., which owns nearly 10.3 million shares of Hughes.

SMITH'S STRUGGLES. Executives at GM, Hughes, and News Corp. aren't commenting. But a meeting, which Murdoch wants by the end of March, would pit News Corp. against a still unformulated bid by Hughes chairman Michael T. Smith to spin off Hughes to shareholders. Smith, the younger brother of GM Chairman Jack Smith, has been struggling for months to line up potential equity partners. So far, though, sources say he has been turned down by Microsoft Corp., General Electric Co., and others. Smith is now contemplating a $6 billion debt offering, say sources close to the deal, as well as possibly selling off some Hughes assets to round out the deal. That won't be easy. "With this kind of equity market, he'd have more luck finding the Holy Grail than equity partners," says Larry Haverty, senior vice-president at State Street Research, which owns 11 million Hughes shares.

GM, however, is under pressure to make a move. Shareholders are eager to see it sell Hughes, thus generating $5 billion to $8 billion to pay down debt. To back Murdoch's bid, Microsoft and Liberty Media (LMG.A ) would provide some of that cash. But the deal hasn't excited Hughes shareholders, who would own 65% of Sky Global but cede management control to Murdoch. Hughes stock fell more than 12% in the week after details of the offer leaked in February. "That deal assumed a lot of growth by [News Corp.'s interactive guide provider Gemstar-TV Guide International Inc.] and the satellites that I'm not sure I believe," says S. Basu Mullick, portfolio manager at Neuberger Berman Partners Fund, who controls more than 2 million shares.

Still, the merger could well be a boon for DirecTV and its investors. A DirecTV-Sky Global linkup would allow DirecTV's access to cheaper programming through News Corp.'s worldwide sports events, along with the advanced technology being used at the Murdoch-controlled BSkyB in Great Britain. By combining DirecTV and Sky Global, the company's shares should be worth about 30% more than their current level, says Haverty. That's based on synergies DirecTV would have with Sky Global's satellite holdings and technology companies such as Gemstar.

For News Corp., of course, the prize is DirecTV's fast-growing customer base in the U.S. and Latin America. DirecTV has told Wall Street it will add 2 million customers this year in the U.S. alone, nearly doubling cash flow, to more than $300 million.

The problem for both sides is the bad blood between the two companies. Investors say News Corp. argues Michael Smith's motivation to block the deal is all about keeping his own job. For their part, Hughes executives have said privately that Murdoch is lowballing the deal during a period of market weakness. Either way, it looks like Murdoch, who has perseverance down to an art form, is going to have to come up with a better deal if he is going to get the fleet of birds he so badly wants.

By Ronald Grover in Los Angeles with David Welch in Detroit

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