US, 23 states sue to block EchoStar-Hughes deal

By Peter Kaplan

WASHINGTON: U.S. antitrust enforcers went to court on Thursday to block EchoStar Communications Corp.'s proposed purchase of Hughes Electronics Corp., dismissing a last-ditch offer by the satellite TV companies aimed at winning approval of the deal.

The U.S. Justice Department and 23 states filed suit in federal court against the $19.5 billion merger saying it would harm consumers in the pay television market. "This merger would give EchoStar control of the skies for the provision of video programming by satellite, leaving customers to suffer from the resulting reduction in competition," Charles James, head of the department's Antitrust Division, said in a prepared statement.

The decision comes three days after attorneys for EchoStar and Hughes made a last-ditch effort to win over the department by offering concessions in a meeting with James. To placate competition concerns, the companies had offered to sell some of their satellite capacity to entertainment conglomerate and seventh-largest cable television operator, Cablevision Systems Corp.

But attorneys at the antitrust division concluded that Cablevision's satellite service "was unlikely to become a sufficient replacement for the vigorous competition that now exists between Hughes and EchoStar within a reasonable period of time."

Officials at the Federal Communications Commission have already declared opposition to the merger. Hughes and its parent, General Motors Corp., said they were disappointed with the Justice Department and FCC positions. "We will consult with EchoStar to jointly determine our next steps," they said in a joint statement.

EchoStar also expressed disappointment, but would not say whether it will fight the department in court. "EchoStar will continue to explore all possible means to be allowed to compete against the cable giants and for more choice for all consumers," the company said.

Under terms of the merger, EchoStar could be forced to pony up $600 million to Hughes as a break-up fee if the deal ultimately fails to get approval from the Justice Department and the Federal Communications Commission. If the deal is rejected, EchoStar also remains obligated to buy Hughes' 81 percent stake in PanAmSat for $2.7 billion.

The deal has a so-called "drop-dead" date that could allow Hughes to abandon the deal and collect the break-up fee if the companies fail to complete the deal by January 21. Charles Biggio, a former Justice Department antitrust official, said it's unlikely the companies would be able to settle or litigate the case before the deadline.

"I think the DOJ action today suggests that it's going to be very difficult if not impossible for them to work out a deal with the agencies that would result in regulatory approval by the (January 21) date," said Biggio, now with the firm Akin Gump Strauss Hauer Feld LLP.

Hughes is the owner of the leading U.S. satellite broadcaster, DirecTV. EchoStar owns the No. 2 Dish Network. As proposed, the merger would give a combined EchoStar and Hughes about 18.2 million subscribers. EchoStar's acquisition of Hughes would reduce the number of pay-television competitors in most U.S. markets, including satellite and cable, from three to two. In rural areas with no access to cable television, the deal would create a monopoly.

EchoStar and Hughes have argued that joining forces would enable them to provide more services and to better compete with local cable TV monopolies.

But that argument came up short with the Justice Department. "While recognizing that certain efficiencies could result, the Department concluded the parties could not demonstrate any efficiencies likely to result from the merger (that) were sufficient to outweigh the substantial adverse impact of the transaction on competition and consumers," the department said.

If they decide to abandon the deal, it could open the door for media giant News Corp. to renew its interest in Hughes. EchoStar had trumped an offer from News Corp., which coveted DirecTV as a potential U.S. component to its global network of satellite services that stretch from Latin America to Asia to Europe.

News Corp. would be less of a concern to antitrust enforcers because -- unlike EchoStar -- it is not currently in the U.S. satellite business, antitrust experts have said. News Corp. could use DirecTV as an outlet for the stream of film and television content from its 85 percent-owned Fox Entertainment Group. News Corp. declined to comment on the Justice Department's decision.

In addition to the sale of satellite spectrum, EchoStar has proposed helping Cablevision acquire digital set-top boxes and signal receiving equipment and line up retail channels. Cablevision said in a statement that it still believed the merger would be pro-competitive.

"We are moving forward, pursuing advanced satellite technology, new programming, and the benefits of HDTV as we continue to explore all available options to meet these consumer demands," Cablevision said.

On Wall Street, few were surprised by the outcome. "Frankly, I thought the FCC decision effectively ended the deal, because the process the work through the FCC administrative law review would go well beyond merger termination date," said Lehman Brothers analyst William Kidd. "This is another chapter. But I think we all knew how the story would end."

(With additional reporting by Derek Caney in New York)

(C) Reuters Ltd.