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DirecTV, NRTC Sacrifice Pegasus

By | June 7, 2004

      The National Rural Telecommunications Cooperative (NRTC) is looking to begin an important new chapter in its more-than-10-year-old relationship with DirecTV by agreeing to a new distribution agreement between the organizations. However, the new arrangement announced last week is coming at the expense of Pegasus Satellite Television, the NRTC’s majority owner, which responded to the pact by filing for Chapter 11-bankruptcy court protection in Portland, Maine.

      Under the new deal, the NRTC agreed to terminate its exclusive agreement to sell DirecTV service in rural markets. In return, the cooperative’s members other than Pegasus either may sign new exclusive deals to remain DirecTV distributors in their territories until June 2011 or they may agree to become non-exclusive resellers in their regions and receive $1,050 for each of their 390,000 subscribers they assign directly to DirecTV. The purchase of those subscribers would cost DirecTV roughly $400 million, according to a research note from Benjamin Swinburne, a satellite analyst with Morgan Stanley.

      Pegasus Satellite Television, the largest independent DirecTV reseller under the previous NRTC deal, received an offer from DirecTV that paid only $675 for each of its 1.1 million subscribers in a deal valued at $750 million. The reduced per-subscriber offer is due to the 2008 termination date of the existing Pegasus agreement, compared with the 2011 scheduled end of the previous NRTC agreement with DirecTV, Swinburne explained.

      Officials with Bala Cynwyd, Pa.-based Pegasus Satellite Television, a subsidiary of Pegasus Communications [PGTV], said their company filed for bankruptcy to prevent an “unlawful termination” of Pegasus Satellite Television’s agreements to distribute DirecTV services exclusively in certain markets. The result likely will be additional litigation between Pegasus and its two partners.

      Also filing for Chapter-11 bankruptcy court protection are Pegasus Satellite Communications, Pegasus Media & Communications and certain of their subsidiaries. However, Pegasus Communications, a diversified media company, did not file for bankruptcy protection. The parent company also owns and/or operates television stations affiliated with CBS, FOX, UPN and The WB networks.

      The bankruptcy filings will seek court affirmation of Pegasus Satellite Television’s “valuable rights” as well as damages, its officials said, from the actions of NRTC and DirecTV to impair those rights. In addition, the same officials accused the NRTC of breaching its “duties” to Pegasus.

      The bankruptcy process should allow Pegasus to continue to provide uninterrupted service to its 1.1 million rural subscribers during the resolution of these disputes and to continue to meet its responsibilities to its employees and business partners, company officials said in a written statement. With 1.1 million subscribers, Pegasus Satellite is the nation’s largest independent provider of DirecTV.

      Bob Marsocci, vice president of corporate communications at DirecTV, said the Chapter 11 bankruptcy filing by Pegasus Satellite “in no way” changes his company’s transaction with the NRTC or the NRTC’s termination of its previous DBS distribution agreement with its members and Pegasus.

      “Last month, a federal district court judge affirmed that the DirecTV and NRTC are the only two parties under that DBS distribution agreement, and Pegasus has no right to that contract,” Marsocci said. “The judge also ruled that DirecTV and the NRTC could modify that contract at any time. There is no ambiguity regarding our rights and the NRTC rights under that contract.”

      Last week’s move by DirecTV is aimed at shoring up the company’s growth in certain U.S. rural markets served by NRTC members where the sales of DirecTV had been lagging. The number of DirecTV subscribers in areas served by Pegasus has been falling, in contrast to the rising growth of DirecTV elsewhere in the country.

      “It was clear Pegasus has seen a continuous decline in subscribers,” Marsocci said. “We think we can stop that and reverse it.”

      With less than 10 percent of those NRTC members now selling the service, the new agreement opens the spigot of potential revenue from DirecTV sales to all of them. The NRTC is a potent force because it represents the advanced telecommunications and information technology interests of more than 1,100 rural utilities and affiliates in 47 states.

      Increased Aggressiveness

      DirecTV gains from the new deal because the company now will be able to be much more aggressive in competing in rural markets against rival EchoStar Communications [DISH] and against cable TV. With the new agreement, DirecTV will be able to sell its service in rural markets nationwide for the first time in company history.

      Previously, a potential satellite TV customer in a NRTC territory who called DirecTV to subscribe was referred to the NRTC and its distributors. EchoStar has had the advantage of selling directly to rural consumers and of offering nationwide programming packages.

      “NRTC customers were not eligible for DirecTV offers,” Marsocci said. “This new agreement takes down all those previously existing walls that certainly did not allow us or the NRTC to grow the business the way that we had hoped.”

      Rebuilding Bridges

      Management at DirecTV and the NRTC recently settled legal disputes involving their original agreement, and they chose to improve their existing business relationship for their mutual benefit, Marsocci said.

      “The relationship with NRTC had not been working,” Marsocci explained. “It was a broken distribution chain. We reached a settlement and the litigation is behind us.”

      The organizations began working together in 1992 when the NRTC became a partner of DirecTV in launching the nation’s first high-power DBS system to rural America. Through its members and affiliates, NRTC members, including Pegasus, collectively provide DirecTV to almost 1.6 million subscribers living in various rural territories.

      Pegasus Satellite Television has been involved in an ongoing dispute regarding the duration of its right to exclusive distribution of DirecTV services. Pegasus Satellite Television claims the exclusive right to provide DirecTV to more than 8.4 million homes in 41 states. The Pegasus unit had annual revenues of $831.2 million in 2003 and DBS operating profit before depreciation and amortization (EBITDA) of $213.8 million.

      Mark Pagon, chairman and CEO of Pegasus Communications Corporation, said his company would take all appropriate actions necessary to prevent NRTC and DirecTV from implementing their “latest scheme.” It is with “the greatest reluctance” that Pegasus Satellite Television sought bankruptcy protection, he added.

      “We intend to pursue a resolution of these matters as expeditiously as possible,” Pagon said in a written statement.

      –Paul Dykewicz

      (Robert Marsocci, DirecTV, 310/964-4656; Andrew Smith, Pegasus Communications, 610/934-7000; Benjamin Swinburne, Morgan Stanley, 212/761-7527)

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