Murdoch and DirecTV: Ready for a Rematch?

His News Corp., in fighting trim, may try again for the satellite-TV system

Last October, after dropping what was to be the deal of a lifetime--a $22.5 billion bid to buy DirecTV and close the loop on a worldwide satellite system--Rupert Murdoch ended up in a mogul-sized funk. The 70-year-old News Corp. (NWS ) chairman had been in and out of talks with DirecTV's parent, General Motors Corp. (GM ), for 18 months. When it became clear that DirecTV had slipped his grasp, a burned-out Murdoch thanked his negotiating team with dinner at New York's Remi restaurant, then decamped with his wife, Wendy Deng, to his Carmel (Calif.) ranch. In the following months, Murdoch vented frustrations by stepping up boxing matches with his longtime Aussie trainer.

Today, Murdoch, looking more fit than ever, is back in the swing--and showing off a leaner News Corp., too. After nearly two years of cutting costs and consolidating operations, News Corp. is among the media industry's fastest-rising stocks. Cash flow is up, and debt, long a Murdoch nemesis, is being paid down. News Corp. President Peter Chernin says the company is simply positioning itself to weather what could be an extended advertising recession. That may be. But those who know him best say Murdoch is shaping up News Corp. for one last chance at The Deal. "Rupert is still obsessed with DirecTV," says one longtime associate. "He's itching to get back at that deal."

Murdoch may get the opportunity some time after October, when federal regulators are expected to wrap up their review of the $28 billion bid for DirecTV by rival Charles Ergen's EchoStar Communications (DISH ). Ergen insists the deal will be approved. But others figure the Justice Dept. and Federal Communications Commission won't let the No. 1 and No. 2 satellite companies merge.

Murdoch himself is taking no chances. For months, his lobbyists have been working Washington, and he has hired former New York Attorney General Robert Abrams to help chat up state attorneys general, who are likely to oppose the deal. Murdoch has even enlisted the help of religious broadcasters, who came out swinging against the EchoStar deal after Murdoch assured them that he could provide better access for their programming. In June, Christian conservative leaders, with Murdoch's help, filed a 472,000-name petition with the Justice Dept. claiming the merger would curb religious broadcasting. Murdoch's troops deny he has stoked the evangelists, but critics charge Murdoch is trying to make the opposition look stronger than it is. "We don't have any problem with News Corp. opposing the merger," EchoStar lobbyist Karen Watson says. "But it would be more legitimate of him to speak out directly rather than using surrogates."

All the lobbying underscores Murdoch's persistent belief in satellite broadcasting, not cable, as the delivery system of the future. Indeed, Murdoch's bet is looking smart as two cable companies are currently under federal investigation and the entire industry struggles to sell new digital and data services to help pare down the ton of debt taken on to upgrade systems. U.S. households subscribing to satellite TV services are expected to grow from 19 million this year to 26 million by 2007. Cable homes will remain static at about 70 million during that time, estimates consultants PricewaterhouseCoopers LLP.

As satellite TV continues to win market share from cable, DirecTV's 10.7 million subscribers would give News Corp. crucial U.S. distribution and close the link between its 36%-owned British Sky Broadcasting service in Europe and Star satellite system in Asia, forming a worldwide network. That would provide enormous leverage for News Corp.'s Fox franchise, for example, to deliver its growing stable of movies, sports, and TV shows in the U.S. It cost News Corp. $300 million in fees to cable operators to launch Murdoch's Fox News Channel in 1996, and Murdoch is still paying cable operators to be seen. Murdoch declined to comment about his chances for DirecTV, but told investors on Aug. 14: "We'll see how the chips fall."

To prep for another go at DirecTV, prolific dealmaker Murdoch has shown some discipline recently. He backed off a high-stakes bid for Germany's bankrupt Kirch Media and is enlisting partners to share the risk for a $1 billion bid for Italy's Telepiu pay channel. Meanwhile, News Corp. execs have been bolstering the balance sheet, slashing $200 million a year with moves like cutting the number of made-for-TV movies Fox Television Network makes, hiring less expensive local cameramen for sports events, and finding partners to help pay for Fox films.

And in Hollywood, hits such as Ice Age and DVD sales from Planet of the Apes helped lift News Corp. revenues by 10% this year. Ratings are up at the Fox News and FX cable channels. With $1.5 billion in free cash flow, Murdoch has paid down $2 billion in debt while building a $3 billion cash war chest. Even the Fox network, where ratings dropped 6.5% last year, is on the mend. Its summer hit, American Idol, is providing a showcase to promote Fox's fall lineup.

Wall Street is buying Murdoch's new act. Since July 31, News Corp.'s stock has risen 19%, more than any other media company. "We're encouraged by their attention to free cash flow, strengthening the balance sheet, and management's restraint on the deal front," says Merrill Lynch & Co. analyst Jessica Reif Cohen.

Don't look for more restraint from Murdoch, though, if DirecTV suddenly becomes available. And unlike his proposal last year--which called for creating a separate company for his satellite and technology holdings to be able to raise public money--this time Murdoch could likely tap his own balance sheet. John C. Malone's Liberty Media (L ), which last time around pledged $1 billion to help Murdoch get DirecTV, says he'll be back. Sources say that Microsoft Corp. (MSFT ), which was in for $3 billion, would likely still be interested. Since it's unlikely a rival bidder would emerge again, one scenario has Murdoch paying just $6 billion or so for GM's controlling 30% stake in DirecTV's holding company Hughes Electronics Corp. (GMH ) instead of bidding for the whole company, says a top Murdoch ally.

A lot could still change. Ergen isn't likely to give up without a fight and could still offer concessions to regulators that might cinch his deal. DirecTV's management, which doesn't like Murdoch, could offer its own buyout plan. But Murdoch is back in the hunt. The funk has definitely lifted.

By Ronald Grover in Los Angeles, with Lorraine Woellert in Washington

— With assistance by Lorraine Woellert

    Before it's here, it's on the Bloomberg Terminal.