Any bid Bell giant SBC Communications [SBC] may be exploring to buy U.S. satellite TV provider DirecTV most likely will not reach fruition, Wall Street analysts predicted.

Lehman Brothers and Bear Stearns both expressed doubt that such a deal would occur. Rather, they expect News Corp [NWS] to emerge as the leading contender to acquire DirecTV in a possible partnership with Liberty Media [L].

In 2001, EchoStar Communications [DISH] beat out News Corp in a negotiating battle to acquire DirecTV and its parent company Hughes Electronics [GMH] from General Motors [GM]. However, the deal unraveled late last year when U.S. regulators refused to allow a combination of the two dominant U.S. satellite TV operators.

SBC officials declined to comment on any discussions with DirecTV and its owners. Nonetheless, industry sources confirmed to SATELLITE NEWS that talks were underway.

Bob Marsocci, vice president of communications at Hughes, said, “GM has stated that it has several options concerning its ownership stake in Hughes and is in the process of evaluating its options.”

Toni Simonetti, general director of financial and international communication at General Motors, added that a variety of avenues are under consideration for Hughes. The business needs of both GM and Hughes are driving the efforts, she said.

Hughes’ need for cash to support its growing PanAmSat [SPOT], Hughes Network Systems and DirecTV business units runs counter to GM’s desire to focus on core businesses, improve its balance sheet and avoid risky businesses that could hurt its overall credit rating, Simonetti said.

“GM needs a superior credit rating and Hughes is a technology business that probably is better off in a more highly leveraged environment,” Simonetti said. “There is not a strategic need for GM to own Hughes.”

Blake Bath, a Lehman Brothers telecommunications analyst, believes “strongly” that a merger will not take place between SBC and Hughes/DirecTV. Bath explained that SBC has far more important strategic priorities than launching a national video service, including bolstering its wireless position and competing with the cable industry, according to Lehman Brothers.

William Kidd, Lehman Brothers’ top satellite analyst, “implicitly” concurred with his colleague by explaining that a partnership between News Corp and Liberty Media was the frontrunner to acquire DirecTV.

News Corp Chairman Rupert Murdoch’s longstanding interest in satellite television, especially in the United States, makes him a top contender in the hunt for Hughes, Kidd said.

News Corp is helped by Liberty Media’s willingness to join forces in acquiring DirecTV, Kidd wrote in a research note. In addition, News Corp offers the allure of being aligned with content, but SBC offers the potential to bundle data and telephony services the way cable companies now do, Kidd added.

SBC’s interest is understandable since satellite TV provides a powerful tool to compete against cable, Kidd explained. SBC’s talks with DirecTV show that the Bell companies’ priorities go beyond building wireless subscribers and defending voice lines to include video. While SBC’s shareholders may not be focused on combating cable, cable companies surely would have concerns about SBC plunging into the video race.

Still unclear is whether SBC or another suitor would be willing to acquire all of Hughes, or just DirecTV, Kidd wrote.

Doug Shapiro, a cable and satellite analyst with Banc of America Securities, said he “highly” doubted that General Motors [GM] would be willing to sell DirecTV separate from other Hughes assets.

Robert Fagin, a Bear Stearns wireless analyst, predicted that SBC ultimately would give up its pursuit of DirecTV. SBC previously had considered buying DirecTV, but decided against it. Deterrents for SBC to buy DirecTV would include a reluctance to spend billions of dollars to acquire a non-core business and the missteps taken by other regional Bell operating companies that have lost money in video businesses.

Bear Stearns predicted that DirecTV would open its books to News Corp, SBC and other interested parties in the near future to begin official bidding.

Potential marketing synergies between DirecTV and SBC would be limited by the regional telephone service provider’s geographic focus on the Midwest and West Coast, according to Bob Peck, Bear Stearns’ satellite analyst. However, DirecTV could gain from a deal with SBC by picking up access to an enhanced broadband offering that would increase its competitiveness with cable, he added.

SBC Chairman and CEO Edward Whitacre has been clear that he wants to acquire other companies, rather than be the target of an acquisition, said Jimmy Schaeffler, a satellite broadcasting analyst who heads The Carmel Group consulting firm.

“To achieve that, it will have to create an answer to the three-way bundling question, involving audio/video, broadband and telephony,” Schaeffler said. “SBC’s DirecTV play, if it succeeds, fulfills the most [difficult] of those three requirements.”

If SBC becomes a serious contender for DirecTV or all of Hughes, News Corp and Liberty Media would face increased pressure and may need to pay a higher price, Schaeffler said. Another scenario would be for SBC to join News Corp and Liberty Media in a three-way partnership, he added.

In related news, DirecTV plans to privately offer up to $1.4 billion of senior notes due 2013. DirecTV also intends to arrange $1.55 billion of new senior secured credit facilities. The senior notes offering and the new credit facilities are expected to close by early March 2003. Net proceeds from the sale of senior notes and the term loan portion of the new senior secured credit facilities would allow Hughes to repay outstanding indebtedness and to fund its business plan through projected cash flow breakeven and for other corporate purposes. Hughes’ existing $1.8 billion senior secured credit facilities will terminate upon such repayment.

–Paul Dykewicz

(William Kidd, Lehman Brothers, 212/526-4849; Bob Peck, Bear, Stearns, 212/272-6665; Doug Shapiro, Banc of America Securities, 212/847-5676; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Toni Simonetti, General Motors, 212/418-6380; Bob Marsocci, Hughes Electronics, 310/662-9986)