Wall Street Analysis

By Paul Dykewicz

Rarely is a company in the satellite industry battered as badly in the stock market by legal proceedings as Pegasus Communications [Nasdaq: PGTV] was last week. The company’s protracted dispute with DirecTV reached a nadir when a meeting between the heads of the companies left each side issuing press releases that appear to put them on a collision course to a courtroom showdown.

Chase Carey, president and CEO of DirecTV’s parent Hughes Electronics [NYSE: HS], issued a statement last Thursday that announced the abandonment of a court- ordered mediation process. The announcement followed a meeting earlier that morning between Carey and Pegasus Chairman and CEO Marshall Pagon in New York.

“We believe that Pegasus has an unrealistic view of its contractual position and, therefore, of its resulting business prospects and fundamental valuation,” Carey said. “With every day that passes, both Pegasus’ significance to DirecTV and its value as a standalone enterprise diminish.”

Carey helped to drive down the stock price at Pegasus by claiming current equity and bond trading levels for the company are “fundamentally disconnected” both from its limited rights and its financial position, as well as the potential value of Pegasus to DirecTV.

Pagon claimed DirecTV is seeking to intentionally damage the value of Pegasus and interfere with its successful completion of a recently announced financing. “Indeed, it would appear from their press release that DirecTV’s larger purpose is to seek to acquire our DirecTV business at a substantial discount to the value that our bondholders and preferred equity holders are legally entitled to,” he concluded.

With dimming chance for a settlement, and DirecTV insisting it will not overpay to acquire its subscribers signed up by Pegasus, investors appeared to recoil. The result is that the stock price for Pegasus dropped 28 percent between the close of trading last Thursday and our press time Friday afternoon. The plunge to the $30 a share range is dramatic when compared with the company’s closing stock price of $45.49 on Jan. 29.

Thomas Eagan, Oppenheimer’s satellite analyst, rates Pegasus as a “sell.” Who right now could blame him?

Paul Dykewicz is the senior editor and senior analyst of SATELLITE NEWS. He can be reached by e-mail at [email protected] or by phone at 301/354-1769.