EchoStar Buy of Hughes Expected to be Uncontroversial at FCC

EchoStar agreed to acquire Hughes Communications for about $2 billion, including Hughes’ debt, which is “expected to be refinanced in connection with the transaction,” the companies said Monday. The agreement, which has already been approved by the companies’ boards, faces federal regulatory approval, including from the FCC, the companies said. Industry observers said they didn’t see an obvious reason for regulators to block the deal, though it could be affected by other acquisition efforts. The deal includes Hughes Communications’ largest subsidiary, satellite broadband provider Hughes Network Systems, the companies said.

"From an FCC perspective, this is probably not a hugely complicated transaction in and of itself,” though political opposition to the deal will depend “on how much noise people make,” said attorney John Hane of Pillsbury Winthrop. The FCC will have to look over all the authorizations that will be need to be transferred as part of the deal, the largest of which are likely Hughes’ satellite authorizations. Hughes uses its Spaceway-3 satellite for its satellite broadband business and is scheduled to launch another Ka-band satellite, Jupiter-1, next year. EchoStar’s exact plans for Hughes remain unknown, though Hughes would vastly increase EchoStar’s international presence, said Hane. Sister company Dish Network’s massive customer list could help fill the new Jupiter satellite quickly, though it’s unlikely that was the driving factor, said Hane. Hughes’ technology platforms and “huge patent portfolio,” also make for an attractive acquisition, Hane said.

An FCC review of the deal will also focus on any market overlap between the two companies, said attorney Frank Jazzo of Fletcher Heald who has represented satellite companies. The agency would look at to what extent the merger of the companies “would create market power in relevant markets,” said Jazzo. If the FCC determines there isn’t much overlap between the two companies’ services, there probably wouldn’t be much reason to block the deal, he said.

Efforts by Charles Ergen, chairman of Dish Network and EchoStar, to take over bankrupt mobile satellite services companies DBSD and TerreStar could add a wrinkle to the deal’s review, Jazzo said. The DBSD and TerreStar deal both still require bankruptcy court and FCC approval. While each transaction would be reviewed separately, it’s “quite possible that regulators will seek information” on any interrelationship between those deals as part of the FCC’s review of EchoStar’s purchase of Hughes, said Jazzo. Justice Department reviews of the deals will also likely take a closer look at the potential competitive impact, Jazzo said.

"I don’t see a lot of issues with this,” said another satellite industry lawyer, speaking on the FCC’s review of the deal. “There don’t seem to be any horizontal issues” because EchoStar and Hughes are in largely different businesses, the lawyer said. When the FCC does ask for industry comment on the transaction, there will likely be some “skirmishing,” but probably not enough to prevent the deal, the lawyer said. As a whole, the deal is probably “good news for the [satellite broadband] industry given the high price he’s paying,” the lawyer said. The deal “validates the role of satellite broadband” and Ergen sees “there is a material role for it going forward,” said the lawyer. The deal also shows that satellite broadband can be a “significant competitive influence,” the lawyer said.

The deal is expected to close later this year and will “greatly enhance EchoStar’s capabilities for broadband transport of video and data,” the companies said. “There is a compelling fit between Hughes and EchoStar”, said EchoStar CEO Michael White. Apollo Capital, which owns 57 percent of Hughes’ stock has agreed to the deal as well, the companies said. Two law firms said they were investigating legal claims against the Hughes board for failing to maximize the value of Hughes’ stock in the deal with EchoStar.

The purchase offers “several strategic merits” said Citi analyst Jason Bazinet in a note to investors. The most compelling reason for the purchase is for the ability to sell Hughes satellite broadband in rural areas, while using S-band spectrum, gained from acquisitions of DBSD and TerreStar, for more urban and suburban households, he said. Hughes has also worked with the S-band licensees in the past and could provide some technical expertise for using the spectrum, Bazinet said. Credit Suisse analysts said the Hughes acquisition will allow a “consumer broadband solution that can be bundled with” Dish’s TV services and Hughes’ hardware production fits well with EchoStar’s set-top box business.