The DirecTV Group [DTV] last week announced it has sold a 50 percent equity stake in a new entity that will contain the assets of Hughes Network Systems (HNS) to SkyTerra Communications Inc. [SKYT], an affiliate of the private equity firm Apollo Management LP. At the time of the deal’s announcement Dec. 6, DirecTV and SkyTerra said the transaction values HNS at approximately $360 million.

“The reason that we sold the 50 percent equity in HNS is that since new management took over, we have made it clear that we are going to focus our resources, our management resources, our energy and time on our core DirecTV, direct-to-home satellite television service,” Bob Marsocci, vice president of communications for DirecTV told Satellite News. “As a result, we have sold several assets including Panamsat, HNS’ set-top box manufacturing business and our equity stakes in XM Satellite Radio [XMSR] and Tivo.” Marsocci said this sale was consistent with DirecTV’s plan to focus on its satellite television business.

For SkyTerra, the acquisition adds a level of brand recognition to its fledgling business.

“What is attractive about [HNS] is its leadership position in the VSAT industry, its technology position, the quality of the Hughes brand in general, its global reach and of course we are also very intrigued with its Ka-band initiative with Spaceway,” SkyTerra President and CEO Jeffrey Leddy told Satellite News during an interview with Editor Greg Twachtman.

HNS is primarily focused on providing broadband Internet satellite networks and service to enterprises via its core enterprise VSAT business. HNS’ other businesses include commercial Direcway, Mobile Satellite and Carrier Networks, as well as a portion of the Spaceway satellite platform that is under development.

And while HNS is more or less a household name in the satellite industry, SkyTerra does not carry the same level of name recognition. “SkyTerra is a relatively new company, certainly it is a new name,” Leddy noted. “The company used to be called Rare Medium Group and was an Internet professional services provider back during the Internet boom days and was an incubator and developer of Internet-based services and technologies prior to my involvement.” Leddy joined the company as senior vice president of operations in June 2002 and has been the company’s president and CEO since April 2003. “When the Internet era ended, if you will, Rare Medium refocused and pursued a couple of telecom opportunities,” Leddy said.

“Our general goal is to look for opportunities to become very active participants, operators, owners if you will, of telecom-oriented ventures,” he added. “HNS fits that bill and even though we are a 50 percent economic interest owner, we will be involved in managing the operations of the business.”

“SkyTerra will have day-to-day management oversight over the new company,” Marsocci noted. However, he added “There will be a certain class of transactions that will require approval by both new management from SkyTerra as well as DirecTV.” Marsocci did not elaborate on what kinds of transactions would require DirecTV consent.

The Terms

According to a press release issued jointly by the two companies, substantially all of HNS’ assets and liabilities will be contributed to a new limited liability company and, upon closing, 50 percent of the ownership of the new company will be purchased by SkyTerra. The DirecTV Group will receive approximately $251 million in cash at closing, subject to certain adjustments, and 300,000 shares of SkyTerra common stock. DirecTV will retain a 50 percent interest in the new company.

The companies added that the cash proceeds received by DirecTV have been reduced by an agreed-upon amount necessary to complete the new company’s planned construction of Spaceway 3. To finance a portion of the transaction, the new company has received definitive commitments for approximately $375 million of debt financing, which includes a $75 million revolving line of credit. Neither SkyTerra nor DirecTV will guarantee the debt. In addition to the stock, SkyTerra will pay $50 million in cash for its stake in the new company.

“DirecTV will not have any funding requirements,” Marsocci noted. “It is going to be a completely separate company and DirecTV is not obligated to support the company in any way with funding going forward.

As for the Spaceway satellites, the rights to the first two satellites, Spaceway 1 and 2, designed for the Spaceway program, are not included in the transaction. Those satellites have been redeployed to support the DirecTV satellite television business and are scheduled for launch next year. The new company does, however, hold onto the rights to the third Spaceway satellite, which is under construction, as well as rights to a contemplated fourth Spaceway satellite and certain ground equipment and related intellectual property.

Along with the equity stake in the new company, The DirecTV Group is left with its U.S. satellite television operations and DirecTV Latin America, Marsocci said.

The Future Of HNS

From the interview with Leddy, it appears that things will carry on business as usual with HNS, including the maintenance of the Hughes name.

There are “no immediate plans for any changes,” Leddy said. “Certainly we will do whatever any new owner does of any company and we will be evaluating” the need for any changes going forward. “Our goal here is to continue to have the company grow, which it has been doing quite nicely throughout the past few years, and try to do the right thing strategically to maximize the performance of the company. The business [HNS] is in will be the things HNS continues to focus on and where we can bring additional synergistic value, we’ll certainly do so.”

With regard to the name, “This is really the only remaining piece of the Hughes Electronics empire of 10 years ago and we want to try and continue [preserving the Hughes] name,” Leddy said.

As far as the fifty-fifty ownership structure goes, Leddy said there is nothing in the agreement that explicitly provides for SkyTerra to pick up the other half of HNS from DirecTV at any point in the future, and it looks as though right now DirecTV is comfortable with its equity position in the new company.

SkyTerra “understands the satellite business,” Marsocci said. “We think there is good potential for some value to be derived from the new company going forward.”

–Gregory Twachtman

(Bob Marsocci, The DirecTV Group, 310/726-4656; Rob Lewis, SkyTerra, 212/730-7540)