The gloss came off News Corp.'s alliance with satcaster EchoStar Communications Corp. Tuesday, as fresh questions arose about the financing of the deal and legal issues facing the combined company.
Contrary to reports out of Monday's presentation to analysts and reporters, EchoStar execs revealed Tuesday that News Corp's only cash commitment to EchoStar is money to finish the construction of News Corp.'s satellites being transferred to EchoStar.
News Corp. announced on Monday it would join forces with EchoStar, one of the smaller but fastest-growing satellite TV operators, to kickstart its direct broadcast satellite business.
EchoStar execs admitted on a call with Wall Street analysts that the company would still need to raise $750 million in new cash to fund its operations for the next couple of years.
News is hoping to persuade a telco, believed to be Bell Atlantic-Nynex, to join the group and fund the development of set-top boxes, which is a big part of the venture's costs.
Such a deal isn't certain, however, as the two telcos (due to merge in coming months) are still debating the best strategy to get into video services. A Nynex spokesman declined comment.
There are also some technical and legal challenges facing News and EchoStar that may weigh on the minds of potential partners. The biggest issue is the need for legislative changes to allow the satcaster to broadcast local TV signals, a point News Corp. chairman Rupert Murdoch downplays, but which industry execs say is crucial.
On Wall Street, analysts said the new financial details emerging Tuesday made the deal look less attractive for News Corp.
"They overpaid," says Media Group Research analyst Curt Alexander, who adds that News Corp. "certainly hasn't lessened its exposure" to the industry.
While News Corp. claimed Monday to be investing $1 billion in cash and satellite assets from its ASkyB joint venture into EchoStar in exchange for 50% of the company, EchoStar's execs said Tuesday the only cash was money to finish the construction of four satellites and an uplink facility that are being transferred. And, also contrary to early reports, MCI is not putting in any extra cash for its 10% stake.
EchoStar "will go to the market sometime. We will have additional needs for capital," EchoStar exec VP Carl Vogel told analysts Tuesday. Vogel also admitted that the deal with News Corp. had raised EchoStar's subscriber threshold for breaking even from 2 million to closer to 3 million. The satcaster now has 430,000 subscribers.
At the same time, EchoStar execs told the analyst call of plans to jumpstart their marketing campaign by halving the cost of their service, increasing their operating losses.
Neither News nor ASkyB would comment, while EchoStar execs were traveling and could not be reached.
The deal still looks good for EchoStar, analysts say, because News Corp.'s investment will make it easier for the satcaster to raise money. EchoStar stock jumped 48% to close at $26.75 Tuesday.
Wall Streeters question whether the deal will reduce how much News Corp. will have to spend to get into the sat-TV market in the U.S. News Corp.'s stock price rose only 62¢, to $21.87 Tuesday.
Media Group Research's Alexander estimates the price cut will increase the losses sustained by EchoStar on equipment sales to $600 per subscriber. As EchoStar expects it won't break even until it picks up at least another 2.4 million subscribers, that implies total equipment losses of $1.1 billion in the next couple of years, in addition to operating losses over that time.
There are several other technical and legal questions facing the combined company, including the need for EchoStar to replace the satellite dishes already owned by its 430,000 subscribers with new ones that can pick up the new satellites brought in by News Corp.
Industry execs say the satcasters also haven't figured out how to sell dishes to apartment buildings, which makes sales in cities like New York and Boston a problem.
And from a regulatory standpoint, News Corp. insists there is nothing in the deal that would allow regulators to slow it down, but sources say it will take some careful work in Washington before the joint venture can proceed as planned.
News Corp. insists that it has received approval from the United States Copyright Office that will allow it to retransmit local TV signals to homes in the stations' home markets.
But lawyers who have read the Copyright Office letter insist that it does not resolve the issue in absolute terms. They say Congress needs to pass a new law to clear News Corp. from copyright liability. Congress is expected to hold hearings on the issue later this year.
Another potential problem is whether the deal with News Corp. will trigger a foreign ownership question for EchoStar. There is currently a debate at the Federal Communications Commission over whether foreign ownership rules should apply to satellite TV.
News Corp. is taking no chances and has carefully designed the deal to avoid any such problems. ASkyB's satellite license won't be transferred to EchoStar but will be held in a special company that News Corp. won't own.
(Chris Stern in Washington contributed to this report.)
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