P'Star debt may bring regret
Sale to GM Hughes hinges on satisfying bondholders
PrimeStar isn't receiving enough from the deal to cover all its debts and is offering to repay $730 million of bonds at about 67¢ on the dollar, a proposal that at least some bondholders want improved, according to sources close to bondholders.
The deal is conditional on acceptance of the bondholder payout, however, so the conflict could be a serious sticking point. Sources said Friday the bondholders want a meeting with PrimeStar, while PrimeStar declined comment.
Bondholders are not the only losers. PrimeStar's cabler owners, including Tele-Communications affiliate TCI Satellite Entertainment, Time Warner, Comcast, Cox and MediaOne, will also take a small loss on their investments in the satcaster.
TCI Sat stock plunges
Stock of TCI Satellite Entertainment plunged Friday as investors realized the deal makes TCI Satellite shares worth only $1 a share. TCI Satellite, whose stock jumped as high as $3.75 last week, closed down $1.46 Friday to $1.09.
DirecTV's acquisition of cabler-controlled PrimeStar was long expected (Daily Variety, 1/6/99), and completes a shakeout of the satellite TV industry prompted by the Justice Dept.'s lawsuit filed to prevent PrimeStar from purchasing News Corp.'s sat TV assets last year.
Since that deal collapsed last October, DirecTV's main rival, EchoStar, has agreed to acquire News Corp.'s sat TV assets, and DirecTV has agreed to acquire its affiliate USSB.
And while this deal leaves DirecTV and EchoStar as the only remaining satcasters, DirecTV's market share will likely be dominant. Assuming DirecTV picks up all of PrimeStar's 2.3 million subscribers, the satcaster will emerge with 7 million subscribers, or about 78% of the market.
Joining the club
That puts DirecTV on par with some of the biggest cablers, DirecTV CEO Eddy Hartenstein noted. The deal also gives DirecTV additional satellite capacity through acquisition of PrimeStar's Tempo high-powered satellites, which Hartenstein said could double the number of channels offered by DirecTV to almost 400.
The deal is "going to mean more pressure for cable, more pressure to upgrade and more pressure to give a good product," said Carmel Group analyst Jimmy Schaeffler.
Still, DirecTV has some work to do to make the deal work. PrimeStar operated a medium-powered service, leasing satellite dishes to its customers, but DirecTV customers need to buy smaller dishes that can pick up a high- powered service.
While DirecTV will operate PrimeStar's medium-powered service for the next two years, DirecTV's aim is to transfer all PrimeStar customers over by swapping dishes.
Moving customers over
"We expect the majority of PrimeStar customers to become DirecTV customers," said GMH chairman Michael Smith, on a conference call with reporters Friday. DirecTV CEO Eddy Hartenstein said the satcaster would make the transition "seamless to consumers."
"It will be interesting to see how successful DirecTV is in migrating (customers) over," said Media Group Research analyst Curt Alexander, who argued that DirecTV was a high-end service whereas PrimeStar had targeted budget-conscious consumers more like those served by EchoStar.
That gives EchoStar the opportunity to try and steal some PrimeStar customers, analysts said. Perhaps with that in mind, investors bought in and EchoStar stock rose $3 to $52.25 Friday while GMH stock rose $1.87 to $46.62.
And while analysts said PrimeStar was not getting a good price, effectively $575 a subscriber, Hartenstein said DirecTV would bear a $400 per- subscriber cost for switching customers. Any erosion of PrimeStar's subscriber base increases the effective cost of the deal to DirecTV, however.
