Wall Street Analysis

By Tom Watts, SG Cowen Securities

The Federal Communications Commission (FCC) staff has forwarded a recommendation to the five commissioners to approve News Corp’s [NYSE: NSK] acquisition of a 34 percent interest in Hughes Electronics [NYSE: GMH].

The FCC staff recommendation would impose minor conditions that formalize voluntary pledges made earlier by News Corp and Hughes’ DirecTV unit. Those conditions include a requirement to offer local channels to 130 markets by year-end 2004, and a non-binding arbitration procedure for cable operators to use if programming negotiations with News Corp’s Fox unit become problematic.

These conditions appear minimal and should not prevent Fox from gaining almost all the benefits anticipated from News Corp’s acquisition of Hughes. We expect the FCC commissioners to give approval shortly, enabling the deal to close before year-end.

Under the merger agreement, Hughes shareholders would receive new shares for 82.5 percent of their holdings. The new stock will be asset-based, not a tracking stock. The tracking stock currently used by Hughes shareholders will be eliminated. Upon closing of the deal, 17.5 percent of each share of the new Hughes stock will immediately be exchanged for about $14.60 payable in News Corp preferred ADRs ($26.88 x .521). The terms of the deal are based on the April 8 closing price of News Corp Series A preferred price of $22.40, subject to a collar of plus or minus 20 percent ($17.92 – $26.88). Based upon a 20 day average of about $28, 0.521 shares of News Corp Series A preferred shares will be payable ($14/$26.88)

These values imply that a current Hughes share is worth about $15.78 ($16.04 x 82.5 percent + $14.60 x 17.5 percent) — a discount from last week’s trading price. Nevertheless, we foresee a number of approaching catalysts for Hughes stock, including final approval of the deal by the FCC, closing of the deal, public appearances of the new management team after the closing, and finally, more details. Those details would address specific actions News Corp intends to take with Hughes. News Corp wanted to wait to disclose those details until after receiving all the government approvals. Overall, the near-term looks positive for Hughes shareholders.

Tom Watts is a 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]. Readers should assume that SG Cowen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months, and to seek compensation for such services.