Will a New Player Ante Up for DirecTV?
By Ronald Grover
O.K., so here's a far-fetched idea: A one-time professional blackjack player from Tennessee waltzes in and somehow squashes a $30 billion deal for the world's largest satellite-TV company that Rupert Murdoch has been working on since November. Better yet, the former gambler owns a company that has Murdoch's News Corp. as one of its shareholders.
The Tennessee waltzer is a guy named Charlie Ergen, who might very well be the most audacious media mogul in an industry where boldness is served up with the morning coffee. Ergen -- "Charlie" as he is known even to those who despise him -- is the chairman and largest shareholder of EchoStar Communications Inc., a Littleton (Colo.)-based company that runs the DISH network. With 5.7 million subscribers, it's the country's No. 2 satellite operator, second to DirecTV, which is run by General Motors Corp.'s publicly traded subsidiary, GM Hughes Electronics Corp.
Murdoch has been negotiating for months to buy DirecTV from GM. And on May 1, GM all but anointed News Corp. as the buyer by saying that its board has "authorized proceeding with further discussions" with Rupert and gang.
Under the deal now being contemplated, GM would get $7.2 billion for its 30% stake in GM Hughes. Current Hughes shareholders, including GM, would also get a 70% stake in a separate company that would hold DirecTV, News Corp.'s stake in Britain's BSkyB service, and a bunch of other satellite- and interactive-TV businesses controlled by Murdoch.
Ergen: "The greatest synergy...is [in] some kind of combination between [Hughes] and EchoStar"
The deal sounds fine, except that Ergen may want to throw the whole thing into the Dumpster. Even Ergen admits that Murdoch "is in the driver's seat," but those around Ergen say he desperately wants to stop that deal. For months, Ergen has been trying to put together a stable of investors so that he can take a run at DirecTV himself. Merger talks failed back in November, Ergen says, when Hughes told him to take a hike.
But in a conference call on May 3, Ergen said he was still very much interested in DirecTV. "For shareholders, the greatest synergy, and therefore probably the value, is [in] some kind of combination between [Hughes] and EchoStar," he said. That comment came two days after SG Cowen analyst Robert Kaimowitz, who is very plugged in to the satellite and interactive-TV world, observed: "EchoStar appears to have laid groundwork for battle over Hughes."
So who the heck is Charlie Ergen to be waging war with Rupert Murdoch? A guy that Murdoch knows better than to underestimate, that's who. Once a certified public accountant for snackmaker Frito-Lay, Ergen got his start in the TV business back in the late '70s after a mid-life crisis -- at 27 -- sent him to Vegas to try his hand at poker and blackjack.
He and a friend were bounced for counting cards, saw a truck with one of those huge satellite-TV dishes on its back and decided, what the heck, looks good to us. They had disasters along the way -- their first satellite dish blew off the back of their truck on a Denver freeway -- but they eventually built a nice little business.
Like the shrewd card player he is, Charlie has always loved a good game of risk. He jumped into the small-dish satellite business in 1990, raised $335 million in junk bonds, bought up some satellite orbit slots, and went head-to-head with GM's much deeper pockets. These days, his is the fastest-growing satellite- or cable-TV company in the country, maybe the world.
Ergen does it the simple way: He gives away dishes and set-top box receivers to customers who sign up for a long-term package of the TV shows he offers. His largesse is impressive: He once gave free dishes to the entire town of Boulder, Colo., in order to snatch customers from Tele-Communications Inc.
PLENTY OF CHIPS.
It seems Ergen's generosity has paid off. On May 3, his company announced that it had not only signed up 460,000 new subscribers in its most recent quarter, but also beaten Wall Street expectations -- reporting $51 million in cash flow, vs. negative cash flow a year earlier of $88 million. On a day when Wall Street tanked, EchoStar's stock jumped $4.90 a share, or 15%.
Cheekiness aside, does Ergen have the stuff to take on Murdoch's News Corp., whose $12.7 billion in sales is about six times that of DISH? He just may, because the only thing GM seems to care about is cash. It wants $8 billion or so for its stake in GM Hughes, which it hopes to use for buying back stock and making restive shareholders a little happier.
Ergen has cash -- and access to more when he needs it. As of Mar. 31, he had nearly $1.3 billion in cash on his balance sheet and was beating the bushes for investors to help him stake a major-league bet: winning DirecTV away from Murdoch and his partners, which include Microsoft and John Malone's Liberty Media. Those two companies have agreed to chip in $4 billion of the cash that News Corp. would pay to GM.
can't say that I love Ergen's chances of foiling Murdoch's deal. But you gotta admire a guy who would give it a try. Sure, there are obstacles. The feds might want to examine whether the combined 16 million-or-so subscribers of a joint EchoStar-DirecTV hookup would be anticompetitive. Ergen thinks that could be overcome, especially with the likes of AT&T having about as many cable subscribers. AOL Time Warner has only a few less, plus a 10% stake in DirecTV that it bought three years ago.
If you're Ergen, you figure that puts everyone on more or less the same playing field. And with George W. (as in, "What-can-I-do-to-help-business-today?") Bush in the White House, even a big combination like that would likely pass regulatory muster.
Already a legendary figure, Ergen would love to get even bigger
For motivation, don't underestimate the thrill on Ergen's part of sticking it to a big player like Murdoch. Ironically, they thought they had a merger in 1997, when Murdoch owned the late, great ASkyB satellite service in the U.S. But he eventually pulled the rug out from under Ergen, and instead started talking merger with the Primestar satellite group (which no longer exists).
Ergen sued for $5 billion, got a satellite and some other neat stuff in settlement from Murdoch, and went back to building his company. Murdoch got a small stake in EchoStar but can't vote the shares. Both men say they still talk from time to time, but I wouldn't bet that anything they have to say is all that pleasant. Would the card player like to trump the megamogul? Bet your mortgage on it.
Charlie Ergen is a man who still loves to bet large. He's already a legend in the satellite business for starting with nothing and becoming a big-deal operator, not to mention tweaking the establishment while he was at it. O.K., so he has to raise maybe $6 billion in cash. Last year, he raised $2 billion in a heartbeat. In fact, he was oversubscribed in that deal. And that was before he showed the world that his model works and that he could be cash-positive while giving away the dishes.
Sure, even the best gamblers can't always win. But they dearly love the thrill of the chance. Charlie Ergen may not get DirecTV, but you know that he's itching to take his place in the game and ante up.
Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online
Edited by Patricia O'Connell