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How Murdoch's US dream
could have reached its end

The news that US satellite TV operator EchoStar has walked away with the prize of DirecTV after usurping Rupert Murdoch's bid at the last minute has, writes Claire Billings, left one question on the lips of observers: what will Rupert do next?

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It has long been Rupert Murdoch's ambition to get a serious foothold in the US through a takeover of DirecTV or EchoStar that would finally consolidate his satellite TV empire, which dominates the pay-TV markets in Asia, Latin America and the UK, with BSkyB.

It is unlikely that Murdoch will take the news that EchoStar is to take over Hughes Electronics, parent of DirecTV, lying down. In fact, he is known to have already secured backing in Washington in support of his argument that an EchoStar-DirecTV tie-up is anti-competitive on the grounds that there will be no competition in the satellite pay-TV industry.

One of the main concerns is that the $26bn (£18bn) EchoStar deal will leave no choice for the 9m homes in rural parts of the US that do not have the option of subscribing to cable because the networks do not pass them.

This creates a powerful argument and Murdoch can be assured of support from senators and representatives from rural areas.

Scott Cleland, chief executive of the Precursor Group, an investment research firm in Washington told the New York Times, "DirecTV and EchoStar are whipping cable in the marketplace today. There is no legitimate argument why they have to merge to compete with cable. If this was decided on the anti-trust merits, it would be an obvious blockage."

Murdoch must be hoping that anti-trust regulators look hard at the numbers involved. A combined EchoStar/DirecTV will have 16.7m subscribers. This is more than even the biggest cable TV operator AT&T, which has 14.4m customers.

Although there is substantial support for his claims, Murdoch has a lot of work to do if he wants to hang on to what looks likely to be his only chance to break into the US satellite pay-TV market.

Despite this, the EchoStar deal does have its supporters. Some think the merger will create a more effective competitor to cable companies, even if it means fewer pay-TV operators. Although this would mean that the 9m people in rural areas would have their choice reduced to signing up to a satellite pay-TV operator or none at all.

As more details of EchoStar's offer leak out, it becomes clear that General Motor's fear of a competition inquiry was News Corporation's only chance of achieving its goal, since EchoStar trumped its deal with an offer GM found impossible to refuse.

EchoStar's deal is worth $26bn (£18bn) and amounts to a straightforward takeover of Hughes. The deal will see EchoStar inject $5.5bn (£3.8bn) into the deal and pay a $500m (£350m) break-up fee. In addition, it buys Hughes' satellite division PanAmSat for $5bn (£3.5bn) should the deal collapse.

Murdoch's deal involved a complicated reverse takeover of Hughes by Sky Global Networks, a holding company for News Corp's satellite TV interests. Murdoch even stripped the company of certain assets that were unattractive to Hughes and GM shareholders, such as its loss-making Italian satellite TV operator and conditional access software manufacturer NDS, which would have landed GM with a massive tax bill.

While on paper Murdoch's offer looks like it was worth less, around $22bn (£15.4bn), but it would have also allowed Hughes investors to own part of Murdoch's mushrooming satellite empire. Microsoft had put up $2.9bn (£2bn) in support of the deal and John Malone's Liberty Media was set to inject $1bn (£699m). GM would have received $4.5bn (£3.1bn) in cash in return for most of its stake in Hughes, while retaining around 4% in Sky Global.

But it was the higher offer that GM finally went for, as it decided to risk the anti-trust inquiry, much to Murdoch's disappointment.

GM and EchoStar appear confident that their agreement will find a way through the regulatory hurdles, although whether this is more than wishful thinking remains to be seen.

For Murdoch, the options are limited. He has been chasing a deal to take over EchoStar or DirecTV for more than 18 months. An anti-trust investigation into the EchoStar/DirecTV proposal could take another 12 months.

The long-running saga of how, if and when Murdoch will realise his dream of getting in on the US pay-TV market is far from over, and it looks as though the deal could take the 70-year-old media tycoon right through to the end of his career.

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