News Corp [NYSE: NWS] has made a preemptive regulatory strike in its effort to acquire General Motors [NYSE: GM] subsidiary Hughes Electronics [NYSE: GMH] and its prized DirecTV unit.

In announcing the $6.6 billion deal, News Corp pledged to comply with the Federal Communications Commission’s program access requirements if the acquisition is approved.

DirecTV competitors, mainly EchoStar Communications [Nasdaq: DISH], are sure to complain to regulators that News Corp might use its control of Fox Entertainment Group [NYSE: FOX] to block their access to Fox programming on reasonable terms. News Corp is loathe to repeat the experience of EchoStar, which tried for more than a year to complete its merger with DirecTV, only to be thwarted by U.S. regulators. With that lesson fresh in mind, the Rupert Murdoch-controlled media conglomerate is taking steps to make clear it will abide by FCC rules.

Under the deal announced last week, News Corp, through its U.S. Fox subsidiary, would acquire a 34 percent stake in Hughes for around $6.6 billion from General Motors.

Regulatory Hurdles

As a vertically integrated media giant, Fox and its parent tried to defuse concerns about potential program access unfairness with an open pledge to make their national and regional programming available to all multi-channel distributors on a non-exclusive basis and on non-discriminatory prices, terms and conditions. That commitment would seem to include Fox’s regional sports channels, although those channels were not singled out in News Corp’s announcement.

A number of regulatory hurdles could endanger approval of the deal, said Chuck Hewitt, a satellite consultant who heads Severna Park, Md.-based Charles C. Hewitt & Associates.

“Program access will be at the forefront of those issues,” said Hewitt, who formerly was president of the Satellite Broadcasting and Communications Association. “There are decrees that could be struck to guarantee protection to EchoStar and the cable industry.”

At the same time, News Corp did not specifically mention that its pledge of non-discriminatory program access would cover its minority shareholder Liberty Media [NYSE: L], a programming giant with recognized brands that include Discovery, QVC, Court TV, STARZ! and Encore. Aside from video programming, Liberty Media’s diverse holdings include broadband distribution, interactive technology services and communications businesses.

The omissions of Fox regional sports channels and Liberty Media in the News Corp’s pledge could fuel competitors’ ire and prompt close scrutiny by the Department of Justice, as well as the FCC. Consumer groups and others also may press U.S. regulators to strengthen existing rules to guard against potential program access problems from News Corp or other programmers that operate satellite or cable TV systems.

“There will always be critics who will attempt to poke holes in our position,” said Bob Marsocci, Hughes’ vice president of corporate communications. In the coming months, News Corp will provide regulators with information about how the transaction will stimulate competition and benefit consumers, he added.

None of the program access issues appear likely to kill the deal, as long as News Corp and Fox agree to any modifications that regulators conclude are needed. EchoStar was forced to abandon its agreement to buy Hughes earlier this year after the Justice Department objected to the combination of the only high-powered satellite TV providers in the United States, and the FCC concluded such a deal would eliminate an important multi-channel video competitor.

Under terms of the deal, GM would spilt off Hughes and sell its 19.9 percent stake in Hughes for $3.8 billion or $14 a share. GM would receive about $3.1 billion in cash, and the remainder would be paid in News Corp preferred American depositary receipts (ADRs). In addition, General Motors would receive $275 million from Hughes as compensation for changing the subsidiary from a tracking stock to an asset-based stock.

In addition, News Corp would acquire an additional 14.1 percent stake in Hughes from holders of GM class H common stock through a mandatory exchange of their Hughes stock received in the split-off. They would receive cash or News Corp valued at around $14 per share, bringing the total value of the transaction to $6.6 billion.

Although GM’s press release indicated that Hughes shareholders would receive a 22 percent premium on their shares, it may not have been clear that only 17.5 percent of those shares would receive the upside. According to SG Cowen, the premium only will be 3.8 percent, based on Wednesday’s closing price. To fund the transaction, Fox, now 80.6 percent owned by News Corp, would give its parent approximately 74.2 million of its shares at a price of $27.99 each. That stock swap would lift News Corp’s equity interest in Fox to approximately 82 percent. In addition, Fox would give News Corp a $4.5 billion promissory note. In exchange, News Corp would provide Fox with the necessary funding for the transaction.

Fox, a developer, producer and distributor of feature films and television programs, had total assets at year-end 2002 of approximately $24 billion and total annual revenues of roughly $10 billion. The company also owns studios, production facilities and film and television library provide content, along with broadcasting and cable networks that offer distribution platforms for its programs.

Wall Street Skeptical

Investors showed displeasure with the deal’s structure by pushing down the share prices of nearly all the companies involved in the deal on April 10 — the first day of trading after the sale was announced.

The fallout consisted of Fox’s share price plunging 17.06 percent to $22.60, Hughes dipping 9.76 percent to $10.36, and News Corp slipping 6.5 percent to $25.45. GM’s share price gained just .02 percent to close at $34.50.

GM has been looking to sell Hughes for several years. The U.S. automaker is badly in need of cash to prop up its pension fund. The total market value of Hughes, including the 10 percent of its ownership that GM spun off earlier this year to its pension fund, is about $17.1 billion.

During a conference call, Hughes institutional shareholders expressed displeasure with the $275 million fee that would be paid to GM. That fee was a pre-condition to the sale that was insisted upon by GM, Marsocci said. “We’ve heard from countless shareholders to convert Hughes from a tracking stock to an asset-based stock,” he said. “We think that, over time, this transaction will do that.”

On the regulatory front, industry observers voiced confidence that News Corp would not be forced to accept concessions to gain regulatory approval that are anymore “onerous” than program access rules already faced by cable operators.

The FCC has promulgated rules requiring vertically integrated cable companies to offer non-discriminatory access to their programming but those barriers have been circumvented in certain instances, Hewitt said.

Steve Blum, a satellite-broadcasting consultant who heads Tellus Venture Associates, said no law exists that prevents vertical integration of content providers and a distribution platform. “It is extremely common in the cable industry,” Blum said.

According to News Corp’s pledge, the company would not offer exclusive programming to DirecTV, Blum said. On the other hand, the National Football League and other sources of content would be able to reach deals to give DirecTV sole rights to programming, he added.

“Murdoch has freely sold programming worldwide to any and all comers to get the widest distribution of News Corp-controlled content,” Blum said.

“It makes good business sense for him and also helps to solve his political and regulatory issues,” he said. “The rules governing vertically integrated cable operators and content owners are an improper use of government authority in the first place. There are adequate antitrust provisions elsewhere in the law and governmental attempts to micro- manage any industry invariably result in abject failure.”

News Corp should be able to overcome any U.S. regulatory hurdles to the Hughes deal, Blum said. Not even media cross-ownership issues are expected to pose much of a threat.

Satellite TV has never been covered by FCC media ownership rules, but Fox has been as a newspaper and television station owner, pointed out Tim Logue, a consultant with the Coudert Brothers law firm. “For opponents of permitting further concentration, this deal is the icing on the cake,” Logue said.

Phillip Spector, a partner with the law firm Paul, Weiss, Rifkind, Wharton & Garrison, said he expected no regulatory deal-killers and argued that the issue of program access with News Corp’s potential ownership of DirecTV would be the same as cable operators that own programming.

“In both the cable and DirecTV cases, the most effective remedy lies not in government regulation, but rather in the economic self-interest of the companies involved,” Spector said. For example, none of those programmers can afford to miss out on EchoStar’s wide base of subscribers.

However, EchoStar is one of many multi-channel service providers that have clashed with numerous programmers over rising carriage fees. EchoStar officials have complained that their service has been forced to drop certain channels to avoid passing along inordinately high rate increases to subscribers.

Carol Ingley, president of the Washington-based C.A. Ingley & Co. consulting firm, said many more regulatory issues could surface in parts of Latin America where News Corp would become a satellite TV monopoly through the merger. Hughes and News Corp each operate competing satellite TV services in those areas.

“Murdoch has long battled for an entry into the U.S. direct-to-home satellite market and is likely to fight very hard to make this happen,” Ingley said. “Hughes Electronics, with DirecTV as a key division, will add greatly to the strength of his global media empire.”

The impact of the deal on two other Hughes units, satellite operator PanAmSat Corp. [Nasdaq: SPOT] and satellite data services provider Hughes Network Systems, is unclear.

“A potential merger of PanAmSat with Intelsat has been speculated about and will be a good operational fit in terms of adding CONUS [continental U.S.] access to the Intelsat network to enable it to better compete with SES Global in all markets,” said D.K. Sachdev, president of Vienna, Va.-based SpaceTel Consultancy.

“However, there is a possibility that a cash deal with investment houses may be preferred to a stock merger with Intelsat,” Sachdev said. “HNS is a global leader in satellite equipment and is getting ready to launch SpaceWay. It is a very well run company and is large enough to stand alone on its own in the market if it comes to that.”

Lehman Brothers satellite analyst William Kidd said he gleaned from a News Corp conference call that company leaders are not yet sure whether SpaceWay makes business sense. However, News Corp has expressed no interest in taking a financial stake in Astrolink, a development-stage satellite broadband business that would compete with SpaceWay, he noted.

News Corp officials did mention a desire to cut costs at Hughes, even though Hughes management was praised for doing a “fine job” in previous efforts to trim expenses, Kidd said.

Lehman Brothers is an advisor to Fox in the Hughes deal.

Under the deal, Murdoch would become chairman of Hughes and replace Jack Shaw, who currently holds that post and formerly headed Hughes Network Systems. Chase Carey, a News Corp advisor, would become president and chief executive officer of Hughes. Eddy Hartenstein, a senior executive vice president at Hughes would become the company’s vice chairman. Hughes would have 11 directors, six of whom would be independent. The five insiders who would hold seats at the Hughes board are: Murdoch, Carey, Hartenstein, plus News Corp and Fox Entertainment Group President and COO Peter Chernin and CFO Dave DeVoe. The six independent directors would be: Neal Austrian, former president and chief operating officer of the NFL; James Cornelius, chairman of Guidant Corp.; Charles Lee, chairman of Verizon Communications; Peter Lund, former president and chief executive officer of CBS; John Thornton, president of Goldman Sachs, and another director yet to be named. Hughes keep its headquarters in El Segundo, Calif.

–Paul Dykewicz

(Bob Marsocci, Hughes Electronics, 310-662-9986; Chuck Hewitt, Charles C. Hewitt & Associates, 410/544-4108; Steve Blum, Tellus Venture Associates, 831/582-0700; Carol Ingley, C.A. Ingley & Co., 202/338-8403; Phillip Spector, Paul, Weiss, Rifkind, Wharton & Garrison LLP, 202-223-7340; Tim Logue, Coudert Brothers, 202/736-1816; D.K.Sachdev, SpaceTel Consultancy, 703/757-5880)