By Steve Symonds

General Motors’ [NYSE: GM] efforts to sell Hughes Electronics [NYSE: GMH] have to be one of the most interesting sagas in the history of corporate acquisitions. For those of us sitting in the audience, it has been like watching a fascinating soap opera. It’s got all of the ingredients one could expect: a horde of suitors possessing varying scruples; repeated protestations of love, devotion, and contrition; and, the requisite rejection by the parents (in this case, Uncle Sam).

If News Corp’s [NYSE: NWS] acquisition of Hughes and its business units ultimately is approved, it may well turn out to be a great deal. News Corp Chairman Rupert Murdoch is famous for making shrewd deals. A lot of “smart money” is of the opinion that the proposed acquisition of Hughes will be yet another in a long string of Murdoch’s successes. However, this is most assuredly not a “slam dunk.” One unavoidable consequence of the protracted process of selling Hughes – and the “off again, on again” nature of its proposed deals – has been that the operating units have been treading water for the past two years. Some cynics would say those units were paralyzed. This is not to suggest that the performance of DirecTV, PanAmSat [Nasdaq: SPOT], and Hughes Network Systems have been bad relative to their respective competitors. That is not the case. The industry also have been suffering through what I have described as the awful effects of the nuclear winter that has struck the telecommunications sector (SN, May 5, pp. 4-5).

Elephants In The Room?

But there are a number of major challenges that have, shall we say, “cropped up” during this long running transaction melodrama. I refer to these as the “Elephants in the Room” – matters that are big enough to have a huge effect on the performance and results of a company. Possibly, by mutual consent between News Corp and Hughes, these issue have not been publicly addressed. The accompanying chart contains my “A-List” of the biggest elephants affecting this proposed transaction. The list does not identify the entire herd of issues, mind you, but enough to give one pause. The burning question is how will the new owner deal with them.

The premise in identifying these challenges is that News Corp, as the presumptive owner of Hughes’ operating companies, intends to keep and run them. That assumption means that only “tweaks” here and there would occur to rationalize operations and to reduce costs. Clearly, though, this is only one possible outcome.

At the other end of the spectrum is the possibility is that News Corp will keep only DirecTV and sell the other operating companies. Some pundits argue that this is the real strategy that’s being pursued. Such a scenario would turn News Corp into the only bona fide, vertically integrated, planet-wide electronic-media giant.

The “new News Corp” likely will focus like a laser on orchestrating and leveraging the global reach of its content, distribution, and technology assets. The combined company, in this case, would aggregate its subscriber base across five continents. News Corp would bring unprecedented muscle to the table in negotiating deals for content, distribution, and technology that it does not already own. The only other media company that comes even close to having such extraordinary leverage is Comcast [Nasdaq: CMCSK], a “mere” one-continent giant.

Viewed through this strategic lens, it could well be argued that all of these challenges are mice, not elephants. After a bit of slicing and dicing to parse out the “valuable bits” of the Hughes operating companies, they will be reconstituted and sold (in theory anyway), helping to monetize this grand strategy. Even if it does take several billion dollars to fully modernize and integrate the valuable pieces of Hughes, at the end of the day isn’t this a mere bagatelle for a media empire with global dominion?

So which is it, elephants or mice…or something “in between”? From my perch in the bleachers, it seems to me that the really interesting part of this soap opera is just beginning. The acquisition phase of Hughes Electronics that’s coming to a close was just a “teaser” compared to what may follow. Pull up a seat while I go make some more popcorn!

Steve Symonds, formerly a satellite industry business development executive, now is managing director/partner of Symonds Associates, of Wilton, Conn. Comments or questions about this analysis should be e-mailed to him at symondss@aol.com.

Hughes Operating Unit: DirecTV

News Corp’s Elephants in the Room

• Customer Premise Equipment: Satellite TV set-top boxes (STBs) are antique. They all will need to be replaced. How will these be funded and capitalized, given the highly leveraged nature of the current balance sheet?
• Capacity for New Offerings: High-definition TV & video-on- demand offerings will be critical to compete with cable, but capacity for these services is not available. This is particularly important during STB migration that may require dual illumination. EchoStar finessed this satellite TV weakness through its deal with SES Americom. What’s DirecTV’s plan?
• Programming: Will content providers have “equal access” for distribution if News Corp owns DirecTV? Of equal importance: Is the playing field level for all the content providers? Will content providers not members of the New Corp empire receive equal or better terms to be carried on DirecTV if News Corp owns the satellite TV service? Viewed another way, high quality, compelling content licensed from “non-News Corp” companies will be much more costly than BSkyB’s line-up. On the other hand, can DirecTV afford not to assemble a world-class (albeit expensive) line-up of compelling fare, given the vastly different competitive landscape in the United States vs. England?
• Competitor Strategic Intelligence: As everyone knows, during due diligence for the EchoStar/DirecTV deal, almost all of DirecTV’s sensitive proprietary information was available to its major competitor. Does DirecTV need a new “playbook” – and is that really enough?

Hughes Operating Unit: PanAmSat

News Corp’s Elephants in the Room

• Core Operational Capabilities: Over the past several years, PanAmSat has taken actions it labels “getting back to basics.” However, critics viewed these changes as “divesting” core capabilities. For example, PanAmSat has not replaced several satellites (PAS-7, PAS-1R, G-11), opting instead to pocket the insurance cash. How will it get back market share, particularly in the international arena?
• U.S. Distribution Dominance: PanAmSat is one of the main platforms for distributing video programming to the U.S. cable industry. If News Corp retains ownership of PanAmSat, will regulators be concerned that News Corp will control access to both DBS homes and cable homes? Perhaps more importantly, how will PanAmSat’s customers feel about both distribution paths being controlled by News Corp?
• America’s Market Consolidation: Galaxy Latin America was PanAmSat’s biggest customer. How can PanAmSat absorb the financial hit wielded by a possible merger between DirecTV Latin America and News Corp’s Latin American satellite TV companies? Could a merger between those financially struggling Latin American operations be achieved from a technical standpoint?
• New Services: Departures and reorganizations at PanAmSat have reduced its once-considerable capabilities, but the company asserts that it is well positioned to offer “new services.” What exactly are those new services? How can they be developed without dilution of margins and/or new infusions of cash? Which senior executives will launch and manage these services?

Hughes Operating Unit: Hughes Network Systems

News Corp’s Elephants in the Room

• Core Business: Hughes Network Systems (HNS) has struggled for years to figure out what businesses it should be in and how to become profitable. Is it a manufacturer, an operator, or both? Will News Corp take the STB business and combine it with NDS (for example), thereby solving this persistent identity crisis?
• Downstream Impacts: HNS is PanAmSat’s second biggest customer. If HNS does become an operator, what will be the impact on PanAmSat?
• Wither Spaceway?: The “last man standing” of the original Ka-band constellations is HNS’ SpaceWay. A mountain of cash has been spent to date and still more is needed. Where will the money come from? A key question that the marketplace ultimately may answer is whether the “original” SpaceWay vision and strategy – at least three years old now – remains valid?