CORRECTED - Analysts question SBC's DirecTV interest

[Gregg Lengling]

Mon February 10, 2003 12:51 PM ET
In a PHILADELPHIA story headlined "Analysts question SBC's DirecTV interest," please read in the fourth paragraph "General Motors Corp., which has a 30 percent economic interest in Hughes," instead of "General Motors Corp., which owns 80 percent of Hughes." Corrects size of stake. A corrected version follows.
By Jessica Hall

PHILADELPHIA, Feb 10 (Reuters) - SBC Communications Inc.'s SBC.N potential purchase of DirecTV, the top U.S. satellite TV operator, would hurt the Baby Bell as it assumed too much financial risk for the promise of future revenue, analysts said on Monday.

SBC Communications, the No. 2 U.S. local telephone company, is one of several companies expected to sign confidentiality agreements this week to review the books of Hughes Electronics Corp. GMH.N and its DirecTV arm, sources familiar with the situation said.

"We do not view this to be a favorable transaction for SBC," said Michael Bowen, an analyst with SoundView Technology Group, who predicted a deal would hurt SBC's earnings.

SBC declined to comment. General Motors Corp.GM.N , which has a 30 percent economic interest in Hughes, declined to comment on SBC's reported interest in Hughes, reiterating that it is exploring all options for the unit.

The media reports of SBC's interest in DirecTV sent shares of the San Antonio-based company down 73 cents to $24.45 on the New York Stock Exchange, where it was among the most active issues.

Meanwhile, DirecTV on Monday sought to tidy up its balance sheet. The company said it will raise up to $2.95 billion in debt through a notes sale and a new secured credit line.

DirecTV will use the proceeds to repay debt under existing Hughes credit lines and to fund Hughes operations to the point of having break-even cash flow.

OFFSETTING SHRINKING REVS

GM has been trying to sell all or part of Hughes since December, when a proposed $18 billion bid by EchoStar Communications Corp. DISH.O collapsed after stiff opposition from U.S. regulators.

A potential bid by SBC could complicate efforts by Rupert Murdoch, who controls News Corp. Ltd. NCP.AX NWS.N , and has long coveted the satellite service as a way to gain a U.S. component for its global satellite network.

SBC and Verizon Communications VZ.N had sniffed around DirecTV last year, but decided against pursuing a deal, sources familiar with the situation said.

SBC, however, recently returned to take a closer look, hoping that the TV and video services business would offset shrinking revenues and increased competition in its core local telephone business, sources said. SBC expects 2003 revenues to fall by low single-digit percentage rates.

"Why would SBC want it? The answer may seem obvious, but we think there are numerous drawbacks. Among these is SBC's spotty track record in the video business and our belief that synergies would be tougher to extract than they might appear on the surface," said Banc of America Securities cable and satellite analyst Doug Shapiro.

While DirecTV would allow SBC Communications to expand its portfolio of products to compete more effectively against cable TV companies, the price may be too steep, analysts said.

The deal's timing also may not make sense as most telephone companies are trying to pare debt and cut expenses, analysts said. At Dec. 31, SBC had about $3.57 billion of cash and equivalents and $22 billion of debt. Its stock price has fallen about 30 percent over the past year.

"With management sounding a cautionary note about this year, it would seem to be a good time to keep one's cash powder dry. But if the DirecTV purchase occurs, we expect the 'spin' will be that it provides one more service SBC can include in its 'bundled' marketing efforts," said Carol Levenson, director of research at GimmeCredit, a bond research service.

"We don't see what DirecTV brings to the telco party," Levenson said, adding that reports of SBC's interest "have us scratching our heads."

SBC and other Baby Bells already have partnerships with DirecTV, offering TV programming to their customers as part of a package of telephone and data services.

Phone companies have made bold but unsuccessful forays into video services. In 2000, BellSouth Corp. BLS.N scrapped plans to offer satellite TV service and discontinued a wireless video service in favor of selling satellite TV service from EchoStar to its customers.

AT&T Corp. T.N last year sold its cable TV arm to Comcast Corp. CMCSA.O , abandoning a strategy to create a one-stop shop for communications and entertainment services.