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Primestar may be acquisition target

Direct-to-home satellite broadcasters DirecTV and EchoStar are reportedly in separate talks to buy competitor Primestar in a deal that could be announced this week, sources say.

Direct-to-home satellite broadcasters DirecTV and EchoStar Communications are reportedly in separate talks to buy competitor Primestar in a deal that could be announced this week, industry analysts said.

DirecTV, the direct broadcast satellite (DBS) subsidiary of General Motors' Hughes Electronics, is apparently the leading candidate, according to analysts and media accounts. But EchoStar may also be interested in buying No. 2 Primestar's assets and 2.2 million subscribers.

Neither of the potential acquiring companies would discuss the ongoing speculation about what appears to be a potentially complicated deal--if the rumors are even true.

"We don't comment on rumors and speculation," said Robert Mercer, a spokesman for DirecTV. EchoStar spokesman Marc Lumpkin also offered a "no comment."

DirecTV, which recently bought U.S. Satellite Broadcasting, is the largest DBS provider with 4.5 million customers. No. 3 EchoStar today announced it has topped 2 million subscribers. USSB holds the No. 4 spot in the industry.

Primestar has had financial trouble for months, analysts said.

"Primestar is in a situation where it almost has to sell because it's about to run out of money," said Evie Haskell, a satellite analyst with Media Business, a Colorado-based communications consulting and research firm.

The company, founded in the early 1990s, uses a mid-power satellite technology that requires a much larger dish than its high-power satellite competitors.

"The medium power technology that they're using is old stuff, it's got its roots in an analog system," said Steve Blum, president of Tellus Venture Associates, a satellite consulting company. "They cannot make it long term as a medium power provider."

While DirecTV and EchoStar sell their smaller, high-power 18-inch "dinner plate" dishes to consumers who can personally install them, Primestar's dishes are at least 27 inches in diameter and must be professionally installed. In addition, the company leases its satellite receivers to consumers, yet has had trouble recouping costs due to a high turnover rate.

Primestar has an annual "churn," or subscriber turnover rate, of more than 30 percent, according to Haskell.

Cable, satellite conflict
Analysts said that because Primestar is controlled in large part by cable television operators that stand to be hurt by DBS gains, the service was only targeted at more rural, lower-income consumers.

"[Primestar] was set up mostly as a preemptive move, especially in that border region between the reach of the cable systems and the real rural areas where people own the large [C-band] dishes," Blum said.

The leasing model is a relic from the company's largely cable operator-owned management.

Primestar is owned by Tele-Communications Incorporated, Time Warner Cable, Cox Communications, Comcast, MediaOne, and GE Americom, the satellite arm of General Electric.

Any deal to buy Primestar's assets would be complicated, analysts said.

Portions of the company are publicly traded while other parts are part of the private cable partnership. Part of Primestar is owned by TCI Satellite Entertainment, the satellite distribution unit of TCI.

"The cable company partnership has never worked well. Nobody has ever been able to lead it, it's like leading by committee," Haskell said. "Some of those cable operators almost viscerally hate satellite."

Indeed, the DBS industry has taken market share from cable in the last year.

Primestar pushed out
Last year, in an effort to upgrade its system to high power satellite technologies capable of handling advanced digital services, Primestar was in the market for satellite assets owned by News Corporation and MCI WorldCom.

Primestar had hoped to buy those satellite assets, however, the Justice Department nixed the deal as federal regulators didn't want the DBS spectrum in the hands of cable operators, according to analysts.

Instead, EchoStar bought the News Corporation-MCI satellite assets. The company has already won antitrust approval and is expected to clear the Federal Communications Commission.

Stock in Hughes closed nearly 6 percent lower today at 44.75. EchoStar shares also closed nearly 6 percent lower at 49.25. TCI Satellite Entertainment shares fell nearly 12 percent to finish the day at 2.5625.