Today's transaction is a two-fold deal. DirecTV will pay about Primestar about $1.32 billion in cash and stock for its medium-power direct broadcast satellite (DBS) business and $500 million in cash for 11 "high-power satellite assets." High-power satellite equipment uses smaller dishes to receive transmissions, compared to mid-power satellite technology.
"We are acquring an opportunity to change the landscape of American video entertainment," Hughes Electronics CEO Michael Smith said during a press conference today. "We expect to create new and innovative revenue streams that are totally digital and readily available in all market today.
"[The acquisition] presents an inflection point in the Direct-to-Home industry, and we will be well-positioned to better compete against our real competitors: cable," Smith added.
DirecTV hopes to see an immediate increase in revenue from more than 2.3 million existing Primestar subscribers after the acquisition.
Smith said that if DirecTV continues to pull in 1 million new subscribers each year, he expects to report operating profitability for DirecTV in 1999.
"We could reach $300 to $400 million in operating profit in year 2000," he said.
The company last month also moved to acquire U.S. Satellite Broadcasting (USSB), a premium multichannel movie service. Combined with today's Primestar acquisition, DirecTV is likely to further strengthen its position as a satellite powerhouse.
"Sure they are buying Primestar's older equipment, but what they're really buying is dedicated subscribers who have bought into the satellite TV product," said Jimmy Schaeffler, DBS analyst at The Carmel Group.
DirecTV said its subscriber base could increase to about 7 million--representing nearly 60 percent of the U.S. satellite market.
But today's acquisition in no way guarantees that Primestar's subsribers will stay with DirecTV.
"Part of the reason you got such a high churn rate with Primestar is because you got a lower demographics," said Schaeffler. "People with less money in the game will continue to be a risk for DirecTV."
While DirecTV and the No. 3 satellite TV firm EchoStar sell their smaller, high-power 18-inch receiver dishes to consumers who can personally install them, Primestar's dishes are at least 27 inches in diameter and must be professionally installed.
"We are going to make the transition seamless for subscribers," said DirecTV president Eddy Hartenstein. "We will continue the lease model and offer [current Primestar subscribers] added services that only we have at DirecTV."
As previously reported, analysts said Primestar has been running out of money for months, hurt by massive subscriber turnover and rivals with more modern satellite equipment.
The deal, approved by the boards of Hughes and Primestar, is subject to approval by the board of General Motors. The acquisition must also win the approval of certain Primestar lenders and of federal regulators.