Wall Street Analysis

By Tom Watts, SG Cowen Securities

Hughes Electronics [GMH] and its parent General Motors [GM] sent a signal last week that they may consider selling just DirecTV Inc., while retaining the other pieces of Hughes – PanAmSat [SPOT], Hughes Network Systems, and DirecTV Latin America. The companies announced that DirecTV intends to raise $2.95 billion independently of Hughes. In the past, money was always raised at the Hughes level, then streamed down to subsidiary DirecTV. This offering represents the first time DirecTV has raised money independently.

The financing represents the strongest statement yet that GM/Hughes may consider selling DirecTV separately. Potential buyers News Corp [NWS] and SBC [SBC] really want only DirecTV, not all of Hughes. This offering looks like a packaging of just the assets that News Corp and SBC want and omits the other Hughes units that are less attractive to these buyers.

The public offering has the added benefit that DirecTV would begin reporting separately to the Securities and Exchange Commission. That change would give potential buyers better insight into the DirecTV business. The offering also creates the benefit of streaming $2.45 billion of the $2.95 billion up to Hughes that later could be transferred to GM either as a dividend or a share purchase. This helps meet GM’s cash requirement and further enables a potential sale of DirecTV.

So how quickly could a sale happen? We believe there is one more ingredient needed to make the perfect deal come together: settlement of the National Rural Telecommunications Cooperative (NRTC)/Pegasus [PGTV] suit with DirecTV. This suit is now entering mediation in an attempt to reach a settlement before court hearings in June. Settlement would enable Hughes/GM to sell a “cleaner” DirecTV that would have marketing rights throughout the U.S., including the rural territories currently covered by the NRTC. The NRTC also may be more ready to settle now that its interests have shifted to broadband and its investment in WildBlue.

In sum, all the ingredients for DirecTV’s sale are beginning to come together.

Tom Watts is managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at [email protected].