EchoStar Opts for Hughes’ Short-Term Profitability Over TerraStar’s Long-Term Potential

[Satellite News 02-25-11] EchoStar’s $2 billion acquisition of Hughes Communications and its subsidiaries is expected to close later this year, creating a synergy that will allow Hughes to both use EchoStar bandwidth and back out of its existing Ku-band satellite capacity leases.
    While EchoStar will be Hughes’ sixth owner in its long history, the Maryland-based company stands to benefit significantly from EchoStar’s 10 satellite-network and leading position in the video transmitting market, according to Hughes spokesman Arunas Slekys.
    “The acquisition doesn’t change the way Hughes operates, but we’re coming into an extensive fleet of satellites and becoming part of a business strategy that is pretty much parallel with our own, which has always been to develop satellite networks for enterprise and government users and, recently, the consumer markets,” Slekys told Satellite News.
    Hughes proved to be the more attractive acquisition for EchoStar over its other option, TerraStar, by providing immediately profitability for EchoStar versus the long-term possibility of profiting from TerraStar’s radio spectrum. “Hughes was a much better fit. I think [EchoStar president and CEO] Michael Dugan said it best when he said the two companies have a ‘rich engineering culture.’ EchoStar, like Hughes, has been a pioneer for satellite technology,” said Slekys. “I also think the next-generation Ka-band satellites we’re launching in 2012 are such a leap in broadband technology that it appealed to EchoStar, as it has been looking to create its own wireless broadband offering for some time now. Everyone knows this is a huge market for satellite broadband in the United States.”
    In a conference call, EchoStar Chairman Charlie Ergen said in addition to Hughes’ customer base and available technology, the acquisition also was the result of deals that were rejected by TerreStar’s minority debt holders and lessons learned from earlier investments WildBlue and StarBand’s satellite broadband systems, in which Ergen lost $150 million. “EchoStar was interested in the satellite element as its own value and did not consider it as a mere key to unlock regulatory approval of the terrestrial spectrum, as was the case for TerreStar and its terrestrial-wireless potential. … We will now be investing in growth at Hughes, whether the growth comes from expanding Hughes’ consumer broadband satellite service in the United State, or in starting similar services abroad,” he said.
    The deal creates another technology-based synergy in manufacturing, as EchoStar makes the set-top boxes and satellite dishes for its sister company Dish Network, while Hughes Network Systems develops equipment for satellite-based high-speed Internet for various enterprise and government customers.
    Financially, the transaction was praised by both sides of the table as a win-win situation for all corporate entities involved. Apollo Management, Hughes’ previous majority stockholder, gained a considerable profit from the sale, as Apollo bought Hughes for $50 million in 2004 and sold the company when it was valued at $360 million. After the deal is finalized, EchoStar will assume Hughes’ debts and $1.35 billion in stock.
    According to a Feb. 15 filing with the U.S. Securities and Exchange Commission (SEC), Hughes’ executive management also profited, with a total of $13.45 million in payouts. Hughes CEO Pradman Kaul and Vice President Paul Gaske received $5.35 million and $2.4 million, respectively, with CFO Grant Barber and Executive Vice Presidents Adrian Morris and Grant Barber receiving $1.9 million apiece.