Filed by EchoStar Communications Corporation
Pursuant to Rule 425 under the Securities
Act of 1933 and deemed filed pursuant to
Rule 14a-12 under the Securities Exchange
Act of 1934
Subject Company: Hughes Electronics Corporation
Commission File No. 0-26035
Date: August 7, 2001
Materials included in this filing contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of
EchoStar Communications Corporation ("EchoStar") or a combined EchoStar and
Hughes Electronics Corporation ("Hughes") to differ materially, many of which
are beyond the control of EchoStar include, but are not limited to, the
following: (1) the businesses of EchoStar and Hughes may not be integrated
successfully or such integration may be more difficult, time-consuming or costly
than expected; (2) expected benefits and synergies from the combination may not
be realized within the expected time frame or at all; (3) revenues following the
transaction may be lower than expected; (4) operating costs, customer loss and
business disruption including, without limitation, difficulties in maintaining
relationships with employees, customers, clients or suppliers, may be greater
than expected following the transaction; (5) generating the incremental growth
in the subscriber base of the combined company may be more costly or difficult
than expected; (6) the regulatory approvals required for the transaction may not
be obtained on the terms expected or on the anticipated schedule; (7) the
effects of legislative and regulatory changes; (8) an inability by EchoStar to
obtain certain retransmission consents; (9) EchoStar's inability to retain
necessary authorizations from the FCC; (10) an increase in competition from
cable as a result of digital cable or otherwise, direct broadcast satellite,
other satellite system operators, and other providers of subscription television
services; (11) the introduction of new technologies and competitors into the
subscription television business; (12) changes in labor, programming, equipment
and capital costs; (13) future acquisitions, strategic partnership and
divestitures; (14) general business and economic conditions; and (15) other
risks described from time to time in EchoStar's periodic reports filed with the
Securities and Exchange Commission. You are urged to consider statements that
include the words "may," "will," "would," "could," "should," "believes,"
"estimates," "projects," "potential," "expects," "plans," "anticipates,"
"intends," "continues" or the negative of those words or other comparable words
to be uncertain and forward-looking. This cautionary statement applies to all
forward-looking statements included in this filing.
Subject to future developments, EchoStar may file with the Securities and
Exchange Commission a registration statement at a date or dates subsequent
hereto to register the EchoStar shares to be issued in the proposed transaction.
Investors and security holders are urged to read the registration statement
(when and if available) and any other relevant documents filed with the SEC, as
well as any amendments or supplements to those documents, because they will
contain
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important information. Investors and security holders may obtain a free copy of
the registration statement (when and if available) and other relevant documents
at the SEC's Internet web site at www.sec.gov. The registration statement (when
and if available) and other relevant documents may also be obtained free of
charge from EchoStar by directing such request to: EchoStar Communications
Corp., 5701 South Santa Fe Drive, Little, CO 80120, Attention: Investor
Relations. Information regarding the names, affiliations and interests of the
participants in the solicitation was filed with the Securities and Exchange
Commission by EchoStar on August 6, 2001.
The following is a transcript of the analyst conference call held by EchoStar
on August 6, 2001.
Operator Good morning, ladies and gentlemen, and welcome to
the EchoStar Analyst conference call. At this time
all participants are in a listen-only mode. Later we
will conduct a question and answer session and
instructions will follow at that time. If anyone
should require assistance during the call, please
press star followed by the zero on your touchtone
phone. As a reminder, ladies and gentlemen, this
conference is being recorded.
Your host for today's conference is Mr. David
Moskowitz, Senior Vice President and General Counsel.
Please go ahead, sir.
D. Moskowitz Good morning. I'm David Moskowitz, EchoStar's Senior
Vice President and General Counsel. I'd like to
welcome all of you today and thank you for joining
us, especially on such short notice. In a moment,
Charlie will come up here and talk to you about the
details of our announced proposal to combine with
Hughes and then we'll answer any questions that you
might have.
But before I bring up Charlie, there are a few
housekeeping matters we have to go through so I'll do
that. First, as you know, this meeting is intended
primarily for investors and analysts so we'll only
take questions from investors and analysts at this
time. At noon today we'll have a separate press
conference and at that time we can answer questions
for the media as well.
Now for the Safe Harbor. This presentation will
contain forward looking statements within the meaning
of the Private Security Litigation Reform Act. Those
statements involve known and unknown risks,
uncertainties and other factors that could cause our
actual results to be materially different from
historical results or from any future results
expressed or implied by those forward looking
statements. I would commend you to the press release
and to our periodic statements filed with the SEC for
all of the risk factors that are involved in our
business. In addition, you are urged to remember to
consider words like may, will, would, should,
believes, estimates, projects, potential, expects,
plans, anticipates, intends, continues, or similar
words and words to a negative of those, to be
uncertain and forward looking.
EchoStar and certain executive officers of EchoStar
may be deemed to be participants in EchoStar's
solicitation of proxies from GM and GMH shareholders.
A detailed list of the names, affiliations and
interest of the participants in the solicitation was
filed with the SEC on August 6th. Subject to future
developments, EchoStar may file with the SEC a
registration statement at a date or dates subsequent
hereto to register the EchoStar shares to be issued
in the proposed transaction. Investors and security
holders are urged to read the registration statement
when and if it is filed and available, and any other
relative documents filed with the SEC as well as any
amendments or supplements to those documents because
they will contain certain important information.
Investors and security holders can obtain a free copy
of the registration statement if and when it is filed
and other relevant documents at the SEC's internet
website at www.SEC.gov. The registration statement,
if and when filed,
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and other documents may also be obtained free of
charge from EchoStar by directing the request to
EchoStar at 5701 South Santa Fe Drive, Littleton,
80120, attention, investor relations.
Now with that out of the way I'd like to bring
Charlie Ergen up to give you a presentation on the
proposed transaction. Charlie?
C. Ergen Thank you, David, and good morning, everyone. Again,
thanks for coming. As you know, we've announced today
a proposal to combine EchoStar and Hughes
Electronics. This combination has a tremendous
benefit, we think, to shareholders, customers,
employees and consumers alike and it's really the
next step we think in making DBS a stronger business
and a more thorough competitor in the marketplace.
I'd like to walk you through this morning why we
believe this combination is attractive to the
shareholders. How we'll position EchoStar to compete
aggressively against the cable industry and why we're
confident that we would receive regulatory approval
of this transaction.
The proposed transaction very simply is a stock for
stock transaction with .75 dish network EchoStar
shares for each GMH share. Values Hughes at $32
billion, which includes about $1.9 billion of debt.
There is an additional $42-$56 billion of synergies
in this deal on a net present value basis and we'll
go through a lot of details on that before we're
done. Economic ownership provides almost two-thirds
ownership to the Hughes shareholders and a little
over a third to the EchoStar shareholders and again
this is potentially tax free to all GM and GMH
shareholders.
The benefits to the shareholders are really that they
increase their value particularly because of all the
synergies so there's really a premium on top of the
premium, an 18% premium on the stock price but then
because of the synergies, that premium is really
extended well beyond that, more than really doubling
the value to GMH shareholders. It combines a 100%
digital platform now to 16 million subscribers so we
can compete effectively with obviously the large
cable and broadband providers. We know there's
consolidation going on within the broadcast industry,
consolidation certainly contemplated within the cable
industry who are already the incumbents out there.
This allows us to reach 100 million households more
effectively, leverages some of the economics we
already have in this business and I think we combine
this with a superior management team that has a great
proven track record who has really built this
industry brick by brick for the last 21 years and has
a thorough understanding of what it takes to put the
discipline in the marketplace and compete.
Let's go through the economics of the proposed
transaction. You can see on the GMH shares, if you
happen to be a GMH shareholder today that we've
offered you an 18% premium over last Friday from $19
to $23 a share. With the synergies that we're going
to go through, that value can go up to between $43
and $49 a share depending on the lower and upper case
that we'll show you and of course you'll run your own
numbers and make your own conclusions about that.
It's a bit more complicated if you're a GM
shareholder and I'll try to walk you through it. If
you're a GM shareholder you own .76 shares of the GMH
share so that's essentially about $17 of value. Today
you have about $15 of value, with our premium on it,
it's $17 in value and then with the synergy we take
you up to about $33 or $38. So even the lower end of
our scale in synergy, if you're a GM shareholder
today, the GMH share would be half of the value of
that today if you believe the synergies that we'll
show you in the low end. And if you're a Dish Network
subscriber, you have a $30 stock as of Friday and the
synergies will take you up between $57 and $66. So
it's a win, win, win situation for all shareholders
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involved in there. We don't believe anybody can put
those kind of compelling economics out here except
EchoStar in this deal.
Tremendous benefits to consumers, that'll clearly be
important as we look at the regulatory side of this.
But we're going to be able to increase our local to
local service, we're going to be able to double or
triple the amount of markets we go to. We know and
you guys know that we don't effectively compete
against cable unless we can broadcast local channels.
The only way we can do that is to more efficiently
use spectrum, this deal allows us to do that. High
definition television is something that still, after
many years, is not rolled out to America. It's
something we can do via satellite with the
appropriate spectrum, it's something that even the
broadcasters haven't rolled out themselves, something
we can do in this offering in a very timely manner
throughout the whole United States. Video on demand,
as you know, is becoming a big factor and strategy,
particularly within the cable environment. That's
difficult for us to do in the satellite industry
unless we have the capacity to do that and this deal
allows us to do that and to compete effectively in
the video on demand. Again, we can add an awful lot
of specialty content, particularly on the interactive
side.
There's significant cost savings and we'll go through
and detail those cost savings but as you can imagine,
when you combine two companies that have completely
duplicated each other's service, billions of dollars
of capital expenditures, half a dozen satellites in
outer space, different uplinks and when you combine
those together you have a tremendous cost savings
that you can pass on some of those savings to
consumers. And of course, one of the things that
excites me the most is we can bridge the digital
divide. We've always wanted to go out there and make
sure that people in rural America are not
disenfranchised because there's no phone company
that's willing to invest or a cable company willing
to invest in high speed access. We can do that more
efficiently with the bandwidth here now and attack
our subscriber base with an offering beyond video.
If you look at it, you guys are certainly aware of
the multi-channel TV landscape with AT&T being the
largest today. On a proforma basis, we would be
slightly larger than AT&T but obviously it's likely
that AT&T will be consolidating with one or more of
the cable operators and in fact by the time we would
consummate this deal we may be a distant number two
in the multi-channel providers. But it's important to
note that this is a combination not of the number one
and two players in the marketplace or even the number
one and four players like Comcast and AT&T, this is a
combination of the number three and number seven
players in the marketplace to make it a more
effective competitor to the strong incumbents in
cable.
If you look at it from a revenue perspective, even
after the combination of this we're slightly smaller
than AT&T as a stand alone company in revenue but
certainly a distant second if they were to combine
with one of the other cable companies. So again,
we're still a bit of a small fish in a big pond, even
after this deal.
Obviously we've shown this slide to you before many
times but we think it's imperative that we continue
to leverage some of the advantages that we have. The
way we get a bigger pipe is to put the spectrum
together and we have to do that. Obviously we have a
national footprint, our costs and our technology is
less per homes passed and we're 100% digital,
although obviously cable's made great inroads there.
Our channel capacity would be enhanced, our planned
upgrades would be enhanced because we can combine the
satellite spectrum we have. Our customer service, at
least on the EchoStar side has been rated number one
in this industry for a long time. Obviously cable has
tremendous advantage of incumbency in terms of being
in the home already, in 77% of the homes and
obviously broadband is one where at least today cable
and perhaps the phone companies have the advantage,
certainly cable has an advantage over satellite and
we have a long way to go to prove the economics for
satellite delivered systems.
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Having said all that, the combination puts us in a
great position. One reason is because we'll be
extremely low leveraged. If you look at the cable
industry as a whole and you run through the numbers
you'll see that there's a little bit less than $2,000
debt per subscriber for the big cable players and
EchoStar Hughes combination on a proforma basis is
only $429 of debt. Why is that important? Even on a
net basis, that takes the cash that we have on our
balance sheet and also with what Hughes has, a little
over $200 debt, obviously that's important. There is
not cash offered in this particular deal. If for some
reason General Motors were to say, "Gee, we like the
deal but we want some cash." This combined entity
certainly has a lot of room to raise additional
capital and still be well below 1/4 in fact if you
just added $5 billion of debt on there you'd see that
you're still in the low $700 range for debt on this
company and still $3 billion of cash on the balance
sheet to run the business. So a combination of stuff,
you can support additional debt if necessary.
Again, I think we as an industry and both companies
have been very efficient in investing our capital and
getting a return on that capital. Our combination of
our two companies on a proforma basis would be a
fraction of the cable industry in terms of capital
invested. Certainly if you look at it on a per basic
sub basis again, while we've been a bit more
efficient than Hughes has been, we've both been
considerably more efficient than the cable industry
has been in terms of deploying capital. Again, that
ultimately is going to result in efficiencies and
lower costs to consumers.
We're going to spend a lot of time on synergies
because that's what really makes this deal work and
why this deal is really unparalleled in the
marketplace. I'm going to start to the aggregate
benefit. Obviously we're going to go through it in
detail but there's really two kinds of synergies.
There's cost synergies and there's revenue synergies.
We're certainly going to get more subscribers than we
otherwise would as we become a more effective
competitor to cable. Our RPU is going to go up as we
add services that we couldn't otherwise do
separately. Definitely, definitely going to increase
EBITDA and we're definitely going to reduce churn.
In aggregate, we believe that we'll get about 9.4
million incremental subs than we otherwise would have
without doing this deal as an industry. We believe
that by 2005 we'll be generating $5 billion of
annualized EBITDA that we otherwise wouldn't have as
independent companies and we think that all that
results in shareholder value of somewhere between
$20-$26 a share for GMH, $15-$20 for GM and $27-$35
for Dish Network subscribers. And we'll go through
the details of this in the presentation and spend as
long as you want to on it.
In fact, here it is in the presentation. This is the
overview of it and as I mentioned, there's cost
savings and we'll go again through detail of this but
SAC is the number one cost savings. As you know, that
SAC has been rising for our industry over the last
five years. One of those driving forces is exclusive
payments paid to keep one of the other, to keep
EchoStar in particular out of some of the CE stores,
obviously that wouldn't be necessary in this
particular combination. Churn obviously has been
rising, a lot of reasons for that including piracy
and non-standardization of a product. We can
obviously make huge inroads into that by a
combination. Nobody doubts that we could save money
in programming, we still pay 5%-15% more than the
large cable operators for our programming, obviously
a combination of 60 million subscribers puts us more
on a level playing field with the big cable
operators.
In terms of revenue, obviously with the advent and
the ability to put more PBR devices out there and the
advent of the 16 million subscriber base growing to a
30 million subscriber base, our advertised and
interactive ability is greatly enhanced over what it
would be if you split that between two companies.
When you can go into the top 100 markets instead of
the
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top 40 markets from a local loop business you
obviously are going to get more customers and we know
that's a proven model for our company and our
industry. So we'll go through some of the details of
those. But about two-thirds of the savings are cost
savings, about one third of the synergies are coming
from revenue savings.
I'll go through some of the assumptions here and
they'll probably be a little detailed, maybe more
detailed than you want here but it's important that
you understand that. Certainly people who don't
totally understand the industry, it's hard to believe
the kind of synergy that we're talking about, raw
numbers, until you really break it down and then I
think you'll see that these numbers are pretty
conservative.
Reduced SAC, we're estimating that it's about $125 in
reduced SAC on a blended basis. That comes in part
from reduced subsidies to the CE stores which are
really out of control at this point in our industry
and again the exclusive fee itself is a big number
there. But we also have great synergies in
standardized and the set top box, building a
standardized, very similar to cable with Doxus
modems, we can standardize that, we can take probably
$25 out of the set top boxes in terms of
standardizing those. So the customer doesn't have a
beta VHS problem, he's just got a standardized system
which would be MPEG2. while we both advertise to
today and when you combine the companies you probably
will spend more in advertising to compete against
cable than you otherwise would individually, you
clearly don't have to send the same message twice. So
you don't have to read one side of the USA Today with
one ad and the next page for a different ad saying
exactly the same thing, you can combine that into one
advertisement. So when you add it all up, about $125
in gross ads and SAC savings that impact in 2005, so
a little over a billion dollars annualized.
Reduced churn, I think this one's probably a little
bit conservative given the recent momentum in
increase churn in our industry. But when you combine
the companies together you get all the services such
as high definition, interactive, standardized set top
box, more local local, all those things are going to
drive down churn. People are going to be more
satisfied with your product. They're going to have
all the things that they want in the product, they're
not going to have to go out and churn on you, you're
obviously going to have more say so in terms of the
quality of customer you get. And then you add piracy
to that where it's very difficult to control piracy
in our industry today where you've got two competing
conditional accesses and two providers who have
different levels of support against piracy so clearly
we think we do a much better job of it in our
industry today. DirecTV has admitted to a $50 SAC per
customer just on the piracy front and the kind of
discipline that needs to take place is the kind of
thing I think we're pretty good at as a company. We
don't own the conditional access company so I think
we could make the objective hard calls, to go and get
piracy under control. So I think the 3/10ths
reduction is probably a bit understated than what it
would be. It will probably actually be a little bit
higher than that in terms of savings.
Reduced programming costs. We've assumed that we'd
get about a 5% cost reduction in programming. That
still doesn't bring us in the first year, it
certainly doesn't bring us to the same point as large
cable operators and then over the next four years
we'll get an additional 5%. Still, a little bit
higher cost than what the big cable operators pay but
it gets us more in line with where they are. Reduced
G&A, we're very confident in reduced G&A. This
essentially is taking DirecTV and Hughes G&A down to
the level that we've historically run at EchoStar so
we put them more in our more frugal environment as a
company. Our limo service will be yellow and has a
meter running kind of thing. So we're very confident
that we can reduce the overhead and G&A. Then, cap ex
we think is probably a little larger than this but
obviously as a company we won't have to build as many
satellite and we'll be able to share them.
Substantial synergies in cost savings. You guys run
your own numbers, some of you will come up a little
more, a little less I'm sure. But almost $3 billion
by 2005, annually.
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Did I skip a slide? Let's see, maybe not.
In terms of revenue synergy ... Jason, I was going to
ask you is there a slide that's different than this
one on revenue synergy? This may not be 1/4
Let me just go and see if I skipped one. Can I go
backwards? Can I go backwards one more? Okay.
I don't usually rehearse but I actually did look at
the slides, there was another one in here, but I
think I can make this work. I'm used to on the cuff
here.
In terms of revenue synergies, obviously the largest
one is the advertising interactive synergy. We've
estimated that incrementally we'll have $30 per
customer by 2005. Of course, cable is already at $40
per subscriber and again with the advent of PDR and
our ability with more bandwidth to do more
interactive national scope and advertising at that
time, closer to 30 million subs and 16 million
subscribers, some of the things that we think we can
do on local advertising through satellite, we think
that is certainly achievable.
Local service is a pretty easy one to understand,
it's a very proven model. We know that we can add
approximately 60 markets by combining the two
companies. That adds about 25 million homes to get
local to local service that aren't getting it today
where individually we would not be able to compete
effectively against cable. We estimate that we get
about 10% more customers in those local markets than
we otherwise would. So in those 25 million homes we
get about 2.5 million subscribers.
Next when I say we will attack the digital divide, we
know that by going and combining our companies that
we can provide broadband access and get to a standard
for broadband satellite as opposed to a beta VHS
which is the direction we're headed as an industry
today. We can get that cost down to consumers from
about $70 to $55 a month. We know we can get more
customers and we know we can get more revenue
ultimately by bringing the cost down into a
standardized system and a standardized satellite
platform. So, again that's another $278 million
EBITDA impact by 2005.
Video on demand, pay per view. We know that just
EchoStar, we don't do as good a job as Hughes does on
the pay per view side, we're about a half a buy a
month below them already so just by combining the
company and getting the additional bandwidth we know
we can bring that up. And again, we think with a true
video on demand model that we're going to get more
buys. There's a lot of early data from the cable guys
where they had video demand and they're getting more
buys. We think a half a buy a month is conservative,
about $100 million of EBITDA. HDTV we know will have
more content, we'll charge for it. For HDTV we know
customers who go out and buy $2,000 and $3,000 and
$4,000 HDTV sets are going to want to watch it and we
know that we're the proper delivery system for HDTV.
We're very excited about that. The EBITDA impact is
probably underestimated because we have some SAC that
takes that number down. Obviously we have a margin to
work with there but obviously HDTV will be a driver
for our industry.
Then the only negative is we've got to swap some
boxes when you put these companies together. That's
coming out of our revenue side, it could just as
easily come out of the cost side of the equation but
we took it out of the revenue side. We will be
swapping out boxes. This is incremental boxes that we
otherwise wouldn't swap out. Understand that we are
swapping out some boxes just as customers are willing
to upgrade from time to time, every four or five or
six years they're willing to upgrade. So we would do
some of that anyway but this is over and above that.
We take that out, a little over $2 billion of synergy
on the revenue
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side. So net/net, that means by 2005 there are about
$5 billion of synergy by the time we fully integrate
the two companies and get it all on one platform.
In terms of the subscriber incremental growth, in
terms of synergy it's pretty easy to understand.
Local local is about $2.6 million. Again, that's
about 26 million homes that we would go to that we
otherwise wouldn't with local local. We already are
getting 10% more customers where we have local than
we otherwise wouldn't. We think that DirecTV has very
similar if not higher numbers than that so we're very
confident of that. Reduced churn, as I mentioned.
Very confident that just a 3/10ths of a percent lower
churn than otherwise would be and it generates 3.3
million more customers who didn't churn off of your
service and again I think that number is probably
underestimated given what's going on in the
marketplace today. High definition television,
specialty content and so forth will give us customers
we otherwise wouldn't have gotten.
Again, if we have 15 or 20 channels of high
definition television, it's unlikely that anybody who
buys a high definition television set will not buy a
satellite system. And again, if you take the Kagen
reports and the consumer electronics reports of how
many high definition television sets are going to be
sold between now and 2005, we cut that number by 75%
and then said, only half of those people are going to
be incremental customers to us. So we really
discounted some of those numbers and still came up
with a pretty large number there. Then again the
video on demand we think has some impact as well.
That's how we go get more subscribers in general.
What's the present value of those synergies? Here's
how we get to the $56 billion which I'm sure you'll
get a lot of questions about. We have a lower and
upper range, realize the $56 billion of synergy is
the upper range. But we take our synergies in 2005 of
$5 billion, we put a terminal multiple on that. On
the low range, it's 10 which is about where I think
DBS is valued today or actually we're not valued that
way today, then cable is about 14 so that's the
higher range. We certainly think that we'll be a very
applicable model to cable by 2005 based on this
combination. So that's somewhere between $50 and $70
billion, we take a discount rate of 10% which is what
is generally used for cable so we get a present value
of our terminal value of between $34 and $48 billion.
We have a present value of cashflows from 2002 to
2005, so the first four years, we'll actually get
savings of course along the way of $7.6 billion so
the present value is $42-$57 billion and if you look
at that on a proforma outstanding shares of the
combined company, that would give you a present value
of somewhere between $26 and $35 in synergy per Dish
share.
So, I know I went through that pretty fast and we'll
come back to questions on that if you don't totally
understand that. I do it a little different way
because I'm from Tennessee and I didn't learn present
value when I was in school because it involved a
computer and I think a slide rule back then and I do
it on the back of the envelope and I do it a little
different way, just to test the math that my guys do
and here's how I do it: Forget all the EBITDA and
forget that all together. I'm pretty confident we're
going to get almost 9.5 million more subs than we
would have otherwise gotten and if you just put a
$3,000 value on those subscribers on the low range,
and if you look at cable today, they're talking about
a $4,500 value. It's somewhere between $28 and $42
billion. I believe we get an incremental value on
those subs because we're going to be better operators
and we're going to get the costs down, we're going to
get churn down lower than it otherwise would be.
We're going to get extra revenue out of those
subscribers so I think the subscribers are probably
going to be at least $500 to $1,000 more valuable. It
certainly is going to stay on the service a year or
two longer than you otherwise would so I get some
other value from that between $16 and $32 billion
total incremental value, discount rate of 10%, that
gives you a present value of between $30 and $50
billion on the back of the envelope.
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That, of course, is a little bit lower than the
previous slide and the reason my back of the envelope
is a little bit lower is that I believe that you pass
some of these synergies on to the consumer in the
form of lower prices. That's what drives you, that's
what really drives you to those 9.4 million more
subscribers, is that you're charging a couple of
bucks less a month for your services than you
otherwise would have as an independent company. When
you pass those savings onto the consumer, we know
that 90% of the customers out there will look at
satellite for a buck or two less a month and now
we're able to do that. So you take a couple dollars
and you run that in your model and you suddenly
realize that of that synergy, $5 to $10 to $12
billion of synergy you're going to give back to
consumers. In my back of the envelope model, it's
really $19-$32 for Dish Network, it's a little bit
lower, on the low end than would be because you do
pass some of those savings on. I think that becomes a
self fulfilling prophecy to get to more subscribers
and if you don't do that then you may not get all
those 9 million subscribers.
Premium to GMH shareholders, again zoomer math. You
take the current stock prices, you take the present
value of the synergies per share, you take the
exchange ratio and the offers and make a long story
short. The fact of the matter is that you're really
more than doubling, even the low end, you're more
than doubling the value of a GMH share today. You're
more than doubling if you believe the low end of our
synergy. Obviously if you said we'll just take a 50%
haircut on the low end, then you would only be 60%
return to shareholders. And so forth and again, I
think they should go through the analysis of our
synergies, it's fundamentally sound, you'll think
it's relatively conservative. So again, tremendous
value to a GMH shareholder in this deal.
The value to a GM shareholder is a little bit more
difficult to understand because we can't do the
methodology exactly the same way. But because they
own .76 shares, their value before our offer was
about $15, or $15 of a General Motors share was
attributed to GMH. That would go, even in our low
range to $32. So you could assume that GM would go up
in price if they pick up another, whatever that is,
$18 of value in our low end. Of course it's $20
something in the high end so again, a good deal for
GM shareholders.
Of course the premium to Dish shareholders, while not
as impressive as it is to GMH shareholders because
we're paying a premium for their stock in the first
place so we're paying a premium on top of a premium
so to speak, still very impressive return for our
shareholders to get somewhere between $26 and $35
additional value. That's what makes this whole deal
so compelling. There's no other combination that can
really do that kind of valuation in terms of doing
that.
If you look at our company itself and why should
EchoStar be the one to make this offer and put these
two companies together? We're already the fastest
growing multi-channel TV provider in the United
States. We've proven that we have a powerful business
model that's EBITDA positive now. In fact, last
quarter it was actually earnings positive.
I think we do have a very focused results driven
management team from top to bottom, that certainly
understands all aspects of the direct broadcast
business. From 21 years experience when we started
with big dishes to the fact that we've built and
launched satellites to the fact that we built our own
uplinks, call centers, service centers, customer
installation network and so I think we know how to
operate this business. Again, I think we have an
historical ability to create a shareholder value,
good times and bad times we've been able to do that.
If you look at our ability to execute, compound
annual growth rate of revenue of almost 100% since
1996. Subscribers almost 90% in terms of subscriber
growth since 1996 when we first started and our
incremental marketshare has grown to fully two-thirds
of all net new subscribers in the DBS business are
going to dish network. That's even with the
disadvantage of not being in a Blockbuster, Radio
Shack, a Circuit City, a Best Buy, a Wal-
9
Mart. Some of the biggest retailers in the country
don't even carry our product. When customers go in
there they don't even have a choice to look at our
product yet we're still able to get two-thirds of all
the net subscribers in the marketplace today. So we
have the ability to execute.
If you look at us versus DirecTV, I think you guys
know all this. I think that we typically outperform
on the key fundamentals across the board and I think
we can bring that management and that focus to a
company that has admitted they've lost their
direction a little bit, they've lost their formula a
little bit. And I think we can bring it back and
bring this industry back to where we all know it can
be. Again, our value creation speaks for itself but
nobody, whether it be cable industry or GM or GMH or
S&P or the cable index has come anywhere close to the
kind of returns that you guys have achieved on our
stock if you bought it in 1998.
Let's spend a minute on regulatory overview because
certainly that's something that is easy for the
skeptics to say well, you won't receive regulatory
approval. That's obviously what the people that want
to be skeptical and don't really understand all the
ins and outs of how this deal will be perceived. But
first of all, I'll start with the improved market
dynamics.
It's important to point out that this is a
combination of the third largest and seventh largest
video pay TV providers. It's the third and the
seventh and when you put them together we'll be about
the same size as AT&T's largest cable company and
smaller than AT&T likely combining with someone else.
So again, that is going to give us 18% of the pay TV
market. The cap, the cap by the SEC is 30% and that
was thrown out of court by a court of appeals judge
saying that was too arbitrary and that the cap should
be maybe as high as 60%. Maybe as high as 60%. So we
know that cap is going to be raised by the SEC, most
people estimate it'll be somewhere between 40% and
60%. We're only at 18% when we combine these
companies.
If you look, the cable industry still controls 77% of
the pay TV market. There's no question that it's
critical that when the regulators looks at this that
they consider us as part of the pay TV market, they
don't consider satellite companies as a separate
market. And if they do that obviously then there
would be problems but we don't think that that's
historically what they've looked at, we don't think
that's what they will look at, we think that they
will ultimately decide that a strong DBS industry is
more 1/4 one strong player in DBS to compete against
the cabling companies, is more competitive, better
for consumers, than two weaker ones. We've been
around for seven years as an industry and we have not
been able to stop the cable rate increases of two and
three times the rate of inflation each and every year
since 1990. Even though we've been around. The only
way we're going to stop that is to become a stronger
industry and realize that we have no programmer
affiliations, we have no objective but to get the
lowest programming cost in America. We don't own the
programming, we don't have cable affiliations, we
don't have 68 million customers that we have to do
favors for in the cable industry. It's a big
advantage that we have to go out and get the best
deals day in and day out for our customers and I
think regulators will understand that. I know they
understand that which is one of the reasons they
turned down a PrimeStar deal before where you had
News Corp and TCI, the cable industry going in. What
they didn't turn down were EchoStar bought the News
Corp assets. So I think that that's very important.
In terms of benefits to consumers, the regulators
will certainly look at this and say overall when you
look at this transaction are the consumers better off
with this deal than if this deal doesn't happen? I
think the answer's pretty clear that the consumers
will be better off. First and foremost we're going to
be able to go to more markets and compete against the
cable with local local. Now we're not the people that
passed must carry. The Congress of the
10
United States forced must carry on our industry, we
have to combine these to be able to comply officially
with that. There's no question that it doesn't make
sense to use bandwidth while people are screaming for
bandwidth, they want the defense department to give
up bandwidth, they've auctioned it off for billions
of dollars for cellular phones, tens of billions of
dollars. And here we have a chance to more
efficiently use bandwidth so that both of us don't
broadcast HBO. Both of us don't broadcast local
Boston channels on different frequencies using
different satellites and different bandwidth. My
analogy is a little bit like flying two planes or two
airlines and the government mandates that you can
only fly them half full. Well, obviously you can't
make much money if you're flying airplanes half full
compared to what you could if you were flying the
airplane full. But we have to use half the capacity
and they duplicate the other half of the capacity,
and when we combine them we can obviously duplicate
what we offer.
And additionally when we get lower programming costs,
we can pass it on to the consumer to give customers
lower prices. We can give things like HDTV,
Interactive Service and broadband service,
particularly to rural America. It's always been one
of my dreams that every American could get broadband
access or HDTV, we can do this with this combination.
I will say that the only aspect that we've looked at
where we think people do have a legitimate point is
that in certain cases in rural America where there's
not a cable operator and where Pegasus is not
involved, so it's very few homes, that those homes
could be disenfranchised if we're not careful and I
think it's an easy answer, which is we have
nationwide pricing so that the most rural customer
who has the least competition as a result of this
merger will always get the best price. It's an easy
thing to put in place and it's an easy thing to work
with regulators on to make sure that nobody's
disenfranchised because of this merger. That same
rural customer is now going to get high definition
television, is going to get broadband access, he's
going to get interactive services and things he
otherwise wouldn't have gotten without this merger.
We mentioned that third party support. Even GM and
GMH management certainly have mentioned to some of
you and certainly have mentioned to us that they
believe that regulatory approval is likely. And
obviously Don Russell actually, it was commissioned
by one of the analysts to do a study and of course it
comes from, is a former chief with the Department of
Justice Task Force and his conclusion in general,
General was that this deal would pass regulatory
approval. So again, it's easy for anybody to go and
say this thing will have regulatory problems, it's
easy for people to be skeptical about it because the
Justice Department doesn't comment on it until you
actually file your Hart Scott Rodino and get all the
facts in front of them and they get to go gather
evidence. But I'm convinced that when they gather
their evidence the consumers will be better off as a
result of this deal. Prices will be lower and we'll
be a more effective competitor as an industry to
cable where we just haven't been able to do that over
the last seven years. They still have 77% of the
business and even the combined entity is only 18%.
Our road map to completion, obviously this is such a
simple deal on the surface that an execution
agreement could be relatively immediate. Now, that's
not to say that General Motors would come back to us
and say gee, we like the deal but we want different
aspects of this. Or, we want some cash. That might
take a little longer obviously because we're
certainly willing to listen to any ideas they might
have. Probably the shareholder vote will take about
four months and we think regulatory clearance takes
about nine months in this deal. Obviously it's
possible that regulatory could take as much as a
year. We're certainly not as complicated as AOL/Time
Warner. That one I think was a year to the day but
we're not as complicated as that so we don't think
we'll take quite that long. But make no mistake about
it, any transaction with GMH, regardless of who might
be involved in it, is going to have a lot of
regulatory scrutiny. It's going to take some time to
get it done. But in the meantime, at least we can put
a roadmap together to solve some of our industry's
problems
11
and become a more formidable competitor to cable.
In summary, it's a powerful combination with
undeniable DBS economics that for the first time get
focused in the same direction. I think the people
that would be most upset about this deal will be the
cable industry and they'll scream the loudest. Great
value creation for all shareholders and we bring
along with that the EchoStar management team,
financial strength and flexibility of the combined
companies and a track record of performance. So with
that I think we will take questions unless 1/4 right
here.
Participant Charlie [inaudible]. What's different with this deal
instead of previous deals you bought to DirecTV?
Operator Ladies and gentlemen, if you have a question you will
need to press the one on your touchtone phone. You
will hear a tone acknowledging your request and we
will take your questions in the order that they are
received. Once again, if you have a question you'll
need to press the one on your touchtone phone. If
you're on a headset please pick up the handset before
pressing the buttons. One moment, please.
C. Ergen ... with or without regulatory approval for I think
$5.5 billion of cash and the assumption of debts was
about $7.5 billion deal. We looked at launching
another satellite that we could jointly operate to
get some of the economies of scale that we talked
about, a fraction of them. Certainly not all of them
but certainly if there wasn't regulatory approval at
least they would be benefit to both sets of
shareholders regardless. Again, DirecTV did not show
any enthusiasm for that and ultimately decided a
couple of weeks ago they didn't want to pursue that
any further. News Corp had exactly the same problem
back in February as you might recall where DirecTV or
Hughes didn't think their offer was good enough or
whatever it was.
Ultimately they appealed to General Motors themselves
directly. We understand from press reports that
they've obviously been in discussions for a long
time. Obviously we're doing the same thing here.
We're saying, look, we don't want our analysis to be
filtered at the DirecTV level, we want our analysis
to be filtered by you the Board of General Motors and
by you the analysts out here. You can look at the ...
people will say, those synergies just aren't there.
we don't think those are real. Well, the fact of the
matter is one of the first calls I got was from
analysts who said, we think you've underestimated
those synergies. We think they're quite a bit higher
than that. So I think you guys get to go to your own
analysis, you put your own numbers in there and
figure it out. But without question the synergies in
this deal, I don't know of any deal that has any
synergies with DirecTV unless you're already in the
business in the United States. Any synergy that the
market gives us credit for is going to be reflected
in this deal beyond the 18% premium we already
offered. So the deal's quite a bit different. That's
not to say that if General Motors came back and said
we didn't understand some of these things, we're
willing to talk more seriously about it, but by the
way, we just have to have some cash. We'd certainly
take a look at that and certainly the combined entity
has plenty of room to support the cash. But they can
take our stock as well. And they can sell the stock,
if the stock went up by the tax payment they would be
better off taking stock and having a liquid
investment, selling it when they feel inclined to
sell as clearly tax rated GMH shareholders.
Speaker I heard you say on CNBC that you maybe want to buy
PanAmSat either way. Is that true?
C. Ergen In our original offer to them we would have bought
PanAmSat. They could have asked us about PanAmSat if
we didn't get regulatory approval and we would have
done that. That gave them certainty. They asked for
certainty, we gave them certainty. I think we were
very creative about how we approached trying to meet
the objectives of General Motors as we
12
understood them from DirecTV. But I think at the end
of the day DirecTV just didn't share our enthusiasm.
They didn't believe there were synergies there. It
was hard for me to believe they didn't believe there
were synergies there because they weren't using the
same slide rule I was using, I guess.
And we thought that it was better to get this out in
the open. I guess to say it another way for those of
you who play poker, if the decks are a bit stacked
against you, spread the deck on the table and let
everybody look at the cards and then they can see if
it's stacked or not. If it's going to hide it back
here then we really didn't get an objective look at
it in our opinion. So we're hopeful that once you
guys get a chance to look at it, the shareholders get
a chance to look at it, people evaluate it. They can
say is this is serious, is this credible, are these
synergies real, is this offer real? We're serious
about it. I don't come out and spend time in New York
and I don't put a suit on unless I'm serious.
Back here?
Speaker [inaudible] as you looked at the transaction how much
money do you think your company needs to raise
[inaudible] operations?
C. Ergen The combined company has $3 billion in cash, that
probably actually is enough to fund the operations as
I understand them. And I think the question would be,
does General Motors want cash? And if so you're
probably raising that amount of cash. We're moving
very quickly to a cashflow kind of model at EchoStar.
I think with proper discipline within the DirecTV
camp, I think you'd get there pretty quick. Just
eliminating exclusive payments and putting a real
focus on piracy probably reduces your SAC by between
$100 and $200 almost overnight. So I think there's a
lot of things you can do relatively rapidly but the
combined entity has plenty of room to raise capital.
No question about it.
Participant [inaudible] or would you not continue to fund that?
E. Ergen Again, we haven't been allowed to do all the due
diligence, obviously that maybe you've done. But
Spaceway is certainly something you have to look at
as how you would combine that for broadband and
again, we would take a look at it and say what's the
best economic use of capital and is Spaceway the
right way to do it or should it be changed a little
bit, should it be sold, should it be downsized some,
or does the business plan make sense. I think they've
already spent $700 or $800 million on that. I think
it's about a $3 billion project over time, so at
least in the United States, so we have to take a look
at that. And PanAmSat obviously has deteriorated
margins and there's some things I think you can do in
terms of value add with PanAmSat, certainly the Net
36 hasn't worked out so well. Certainly Latin
America's not going well, certainly some things you
could do there but it's an asset of great potential
value but like any asset it has to be managed. You
can have a great racehorse out there but if you don't
have a jockey on it, it's not going to win any races
and we have to go out there and look at this company
and say we think we can do a better job. If we didn't
think we could do a better job, we wouldn't be
offering the premium that we are.
Yeah, Tye. Can you, by the way, state your name or
identify yourself and the firm.
T. Corr Tye Corr [sp] Credit Suisse First Boston. Can you
just elaborate a little bit on the logistical
challenges of establishing a standard platform in
terms of would you switch out the DirecTV boxes or
would it be the Dish network boxes that would be
switched out? And which orbital flat would serve as
the common platform? And then on the cost side, what
is your estimate on the cost per subscriber to
establish that standard platform?
E. Ergen It's a good question. Again, that's something we
would do in conjunction with DirecTV but there would
be very much a logistical issue in terms of how you
would combine the
13
platforms. You have a lot of different options about
which orbital slot would be your main orbital slot,
whether it be the 110 location or the 101 or 119
location. And you have a lot of logistical issues as
to what would be your standard. Given the piracy
issue that we see today, I think the decision has
become easier perhaps and given the fact that the
DirecTV system is not MPEG2, the world standard, I
think you probably would go to an MPEG2 system which
certainly at a bare minimum two sets of conditional
access systems so if you get pirated, you have the
ability to change that on the fly.
That could mean that you're switching out as many as
10 or 15 million set top boxes over a period of three
or four years. Having said that, you're going to be
switching those out to the personal video recording
devices, interactive boxes and so forth, so it's not
as bad as it sounds from an incremental basis. But
clearly it'd be a very similar issue to cable going
from analog to digital. We are going to have some
upgrade cost in that. We believe that's about $2.5
billion incremental for the set top boxes over what
we would otherwise spend separately. I know many of
you know that DirecTV already has a plan to go out
and upgrade their boxes called Vegas that they've
talked to the Street about, apparently. And again,
they already plan to do some of that at great
expense. We think that expense can be greatly reduced
and get to an industry standard that'll be better for
consumers.
So that's a detail that we've thought a lot about. We
think there's a lot of options to that. We're
comfortable with what the downside, biggest possible
number there is and we know we can make it a better
system as a result of that, and we certainly know we
can rein in piracy.
R. Kamowitz Robb Kamowitz with SG Cowen. Can you describe the
type of synergies that you would or the difference in
synergies that you would get in terms of an outright
merger versus just a specialty sharing arrangement
that you might be able to do with potential new
owners of DirecTV if it's not you?
E. Ergen One of the reasons, Robb, for the timing today is
we're getting ready to launch our, and they are going
to be launching their local, local spot beam
satellites. And as we position those in outer space,
you kind of get to a point of no return where you
can't ... where if you don't have an agreement, you
can't get ... you get to some synergies in the
future, but it costs you so much to get there in
terms of switching people around. So the time is now
to do that.
And unfortunately we have never been able to get ...
I've tried for five and half years to have talks with
DirecTV to share something simple like backhaul on
fiber which saves them $20 million a year and us
probably almost as much and we can't even do that. We
just haven't been able to get to where we could share
anything and regulatory approval, no matter what
happens with their company, is probably going to be
nine months minimum for anybody. We're probably
pretty set in our ways. Nine months from now once our
satellites are up and their satellites are up in
terms of local local. So the time to do it is now. We
think the best way to do that and the reason we're
making this offer today ... we've done all the
things. We've been talking to DirecTV for two years
to put the systems together. We've had a lot of
support from previous management. That management's
not there any more. We thought we had things going on
that were positive there. We've come back, now we're
going to put the cards on the table so that everybody
can see them.
Back there.
Participant [inaudible] would you be looking to sell PanAmSat if
you did acquire Hughes?
E. Ergen I can't quite ... what assets did we look at?
14
Participant What assets would you be looking to rationalize if
you did acquire Hughes and specifically what's your
view on holding PanAmSat?
E. Ergen I think the core asset is DirecTV. That's where the
synergies are in this business deal. That's a core
asset. That would be off the table. I think that you
might ... certainly PanAmSat's a very valuable asset
if properly managed but it's certainly not critical
to the business. Spaceway. Big question market I
think in everybody's mind is how valuable it is.
Latin America. We're not a company that's looking for
global dominance as a company. Latin America I think
would not be critical to the synergy in this
business. H&S is very similar to our ETC side of our
business which is the engineering side of our
business. I think it's not critical by any means but
certainly a combination of ETC and H&S, they both
have valuable assets that help drive your DBS
business. But I think the cable competition is so
formidable out there that you have to be real careful
about trying to be everything to everybody and I
think you have to really focus as a management team
on what it is you want to be. And we know what we
want to be. We're not a programmer. We're are just
... we're distributors of zeros and ones in the
United States to consumers, every square inch, all 50
states. That's what we are as a company and we like
to have a relationship with those consumers where
they trust us and think they're getting a fair value
and in doing that we wouldn't necessarily have to
have some of those assets. Be nice to have and if you
can afford all of it and manage all of it, you'd take
a look at that but if you needed capital or you
didn't think you could manage those assets or
somebody offered you a price that was compelling,
take a look at it.
Right here in the middle. I apologize, I can't see
because of the lights, so I don't even know who I'm
looking.
M. Nabi Hi, Charlie, it's Mark Nabi with Merrill Lynch.
E. Ergen Had I known it was you, Mark, I wouldn't have called
on you.
M. Nabi Oh thanks. Just a question regarding I guess the NRCT
and talking about the softening out of the DirecTV
boxes and then you talk about the regulatory
requirements needed. So how would that work in your
mind? I mean how would a Pegasus or the NRTC compete
if you're going to swap out those potential
subscribers to the EchoStar platform at 119? I'm just
trying to get a better understanding, particularly
when you have to talk about competition in areas
where there's no cable.
E. Ergen Mark, it's a good question. I think all the pundits
who said this'll not have regulatory approval haven't
figured out that their marketplace today in rural
America even with this deal there'd still be two
choices, one would be the NRTC/Pegasus, one would be
Dish Network probably. So that wouldn't change and I
think that we would look to work with NRTC and
Pegasus to make sure they're not disenfranchised in
any way and make sure that their customers are taken
care of, even if it's at our expense in the sense
that we're changing out the system unbeknownst to
them, I mean without their direct involvement in it.
So those are I think the things you have to look at
but clearly those are companies that do well in rural
America today and we don't see that changing.
Back here in the corner.
A. McLener Hi, Alex McLener from Redman Capital. To go back to
the poker game or the racehorse analogy.
E. Ergen An analogy is the lowest form of anything. I
apologize.
15
A. McLener I understand, but to go back to the deal itself
rather than the potential synergies, if GM's Board
says EchoStar we've heard this all before and we're
just not going to go with it for regulatory reasons
or whatever which you don't agree with and they go
forward with the News Corp deal, would you be willing
to have a ... and they'd have to have a shareholders
vote, would you be willing in that instance to
actually go directly to the shareholders to basically
file some sort of proxy statements to preclude News
Corp from getting the shareholders votes? In other
words, go directly to the GMH shareholders and away
even if GM did not approve your transaction?
E. Ergen I don't want to go there with that question. I think
at this point we think we want to hear what GM has to
say or answer any questions that they may have
privately before they make an answer so that ...
Because I think when you look at the economics of
this they're so compelling that you've really got to
take a look at is and say maybe this is the right
thing for our shareholders. And again, I think to
some degree shareholders will have input in that. I
think at the end of the day you've got to run a
company for the benefit of the shareholders. As hard
as that is for me to give up super voting shares to
make this transaction work, that is not something I
personally want to do. I've worked my whole life to
be able to be in control of destiny but this deal is
so compelling that this is probably the only deal in
my lifetime that I would ever do that for and I think
that they have to have the same attitude that they're
going to go out and do the best thing for their
shareholders and I think when you do that, this deal
comes together.
M. Nabi Just as a follow up have the synergies and benefits
changed in the last year in any way the economics in
your mind?
C. Ergen The economics were better last year. We would have
been closer to ... we would have less boxes to switch
out or less things to do. Having said that, the
piracy issue has become more known about and I think
we understand a bit more what we'd have to do about
that. In that sense I guess we'd have a little bit
better business plan to go after that than we might
have last year at this time. But no, I think the
sooner we ... I would have liked to have gotten a
deal done two years ago, five years ago, a month ago.
They've obviously been looking at deals for over a
year now publicly and let's take a week and let them
look at this and go to them and push the numbers at
the GM level and see if they see the same things that
we see. I mean I can't believe you can't look at this
and not see what we see.
I'm going to take some questions from the phone, if I
can. Maybe I can hear them down here. Can we do that?
Operator Our first question is from Jeff Woldarczak, CIBC
World Markets. Please go ahead with your question,
sir.
J. Woldarczak Thanks, Charlie. Have you had discussions with news
regarding receiving concessions to walk away from a
potential bid?
C. Ergen I can't comment on that.
J. Woldarczak Okay, what was your sort of long term implied U.S. TV
household satellite penetration rate before this bid
and where do you think you can get to?
C. Ergen I think we used industry, we tried to use industry
analysts' numbers so we didn't confuse everybody with
some of our own stuff. I believe that in 2005 that
was $21 or $22 million and we think it goes by about
$9 million higher than that. I think we took an
industry consensus. We use an industry consensus from
analysts, is that correct. Okay, $22 million to $9
million north of that, $31 million.
16
J. Woldarczak Okay and then just what's your implied operating cash
few margin in 2005?
C. Ergen Operating cash margin?
J. Woldarczak Yeah, combined.
C. Ergen I was going to say 40% but Jason's over here, we're
working the models, so it's closer to 45%. I kind of
run everything on the back of the envelope for me and
that 40%'s a working number. If I start getting
higher now I want to pass on savings to customers, if
I get lower than that I know I'm running an efficient
operation, I know I need work to do.
J. Woldarczak Fair enough. Thanks.
Operator Our next question comes from is from Waldo Best of
Morgan Stanley. Please go ahead with your question.
W. Best Thank you. Just a follow up question on the super
voting control issue. As the transaction stands right
now as proposed, what would your voting position be,
control position would be of the company?
C. Ergen Again, all these details are not in the letter.
Obviously you can't put all the details on our offer
to GM but what we have offered GM in the past and are
willing to do is that EchoStar shareholders would
have 34% of the votes post-deal and I would have the
majority of that 34%. I imagine it would be around
30%. I have about 90% of that 34%, so I have about
30%. So that would make it tax free and obviously be
a company that would be run by a Board of Directors
without ... the way we run EchoStar today. Many
people think I get to make decisions today. My Board
of Directors talks me out of stuff all the time. They
didn't talk me out of this one because they supported
it.
W. Best What would your effective voting position be?
C. Ergen In that particular scenario, I would have about 30%
votes of the total company. EchoStar shareholders, of
which I would be the largest, would have 34% and the
GM and GMA shareholders would have 64% of the votes.
That's making it tax free. That's the general simple
... we try to make this transaction simple. We don't
need to go another year with the transaction that's
complicated if we can help it.
W. Best Okay when you look at the two outstanding convertible
issues that you have, have you studied whether or not
change of control puts will be triggered under the
transaction as proposed?
C. Ergen We've looked at the provisions in general, both on
our debt and converts, and again, you'd have to see
... we don't have enough detail of how the
transaction would ultimately be contemplated as to
how that change of control provision may or may not
apply. Having said that, we don't think ... we think
obviously the economics of this are compelling and we
that that obviously our bondholders will support a
deal like this under any circumstances.
W. Best Thank you.
C. Ergen Let's take one more question if we've got it.
Operator Our next phone question comes from Gary Lapidis of
Goldman Sachs. Please go ahead, sir.
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G. Lapidis Good morning. A couple questions. First would be you
mentioned that you get the feeling that maybe GM has
not been ... doesn't have as intimate a knowledge of
what you're proposing as maybe you'd like them to and
that maybe DirecTV didn't believe in the synergies,
maybe since a lot of the synergies are their jobs. Do
you think that really this is an issue, that GM
doesn't understand what you're offering and that once
they see it maybe they'll be a lot more receptive to
it?
C. Ergen I can't speak to DirecTV's motivations and in
fairness, we had a representative from GM in some of
these meetings. We did have a representative, but we
didn't have Board members for GM, we didn't have an
executive officer of GM. And again, I just use logic.
The economics of this deal are so compelling, they
cannot be matched anywhere else, we don't believe. We
don't believe any other offer can come to GMA
shareholders that will offer this kind of value that
it's hard to believe that if they truly understood it
that we wouldn't have significant dialogue at the GM
level.
Now you may get through that dialogue and ultimately
decide one party or the other that the deal doesn't
make sense. We just never got that opportunity to do
it and you guys know the business better than anybody
and I don't have to convince you of the economics of
this. There'll be skeptics other places, but I don't
think they're going to be in this room in terms of
the economics of the deal.
G. Lapidis Okay, just on a related question. Since so much of
the upside is the synergy, how much of that synergy
might you be willing to pay GM in the form of cash,
if at all?
C. Ergen Well, we offered ... I believe we offered, as I
mentioned before, $5.5 billion in cash, so again ...
I don't know what you do in life when you offer ...
somebody tells you they want $5 billion of cash and
you offer them $5.5 billion of cash and they say
they're really not enthusiastic about that. So I
tried something different which is how about stock
and if you wanted to convert it to cash, you have the
ability to do that or you can give it to your GM
shareholders if you do want cash. I mean we're happy
to talk about that.
The only thing I can tell you that we were told that
they wanted something at least $5 billion of cash.
And we believe we accommodated that in an early
offer. So we're certainly willing to revisit that if
that's something that is critical to make this deal
done. This deal makes sense, it's great for everybody
and we're going to try our best to get it done.
G. Lapidis And would you be willing to price that cash with some
of the synergies in it, in other words that for the
total consideration on the cash piece they're
actually getting some of the synergy upside?
C. Ergen I wouldn't want to speculate on that. If they really
believe there are synergies there, they ought to hold
on to the stock would be my initial reaction, but I
don't know how you do deals where you say you can
sell your stock, but oh, by way, I still get the
synergies if there's any there. I mean unfortunately
usually when I do a deal, I have to make a decision
and I don't necessarily get ... if I don't take the
downside risk, I usually don't get the upside. It
would seem to be that would be disenfranchising the
GM shareholders because that's come out of somebody's
... the EchoStar shareholders.
I would say this, based on your example, I'm not sure
that that would be fair. Having said that, if
somebody can show me a way that's fair to EchoStar
shareholders and GMA shareholders where GM retains
the upside after they've sold the company, if
somebody can show me that, and people would vote for
that, I think we'd consider that.
G. Lapidis Well that seems like a fair answer. Thank you.
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C. Ergen Let's take from the audience here, I think in the
middle here. Two more questions? Okay.
C. Davis This is Clark Davis, Ridgecrest Partners. If the
logic and the economics of the deal are so compelling
for the combined company and you think over the next
week that even though GM side and Jesus had a year to
look at the economics and realize that there is huge
synergy, do you think you can convince them of that?
Then it seems like the catch is the deal can't go
through Justice and FTC. So as shareholders of Hughes
and Dish, how do you get comfortable with that side
of the equation?
C. Ergen Well I don't think anybody in any ... this
transaction is so big, not matter what they do, that
nobody would stand on the podium and convince anybody
that it's going to go through regulatory approval
just like an [inaudible]. AT&T and Comcast can ...
that one supposedly has no problem, right, but if you
can combine the number one and number four companies
and you can't combine the number three and number
seven companies, then something's wrong here. I can't
convince ... I'm not going to be able to put an
ironclad guarantee out there, but I can tell you that
I believe, based on our regulatory counsel, based on
talking with former people in the government, former
people from Justice, and knowing what I know from
Capitol Hill, the FCC and Justice and the FTC, I
believe ... I have a lot to lose personally. I
wouldn't make this bet unless I felt the likely
outcome was that we would pass regulatory approval.
I'm not saying that you wouldn't have some serious
discussions with regulators about how you protect the
consumer.
But I think you're going to find consumer groups are
on the side of this deal, particularly maybe versus
some of the alternatives. I don't think all the
information is out there. I don't think people have
realized that Pegasus and NRTC are still in rural
America after this deal is done. They haven't
realized that we are willing to go to a nationwide
pricing scheme where the people in rural America can
get the benefit of the robust competition in the
cities. I think when you look at those things ...
people don't realize the efficiencies that are
garnered from putting spectrum together which becomes
a very ... which is a very, very valuable resource
today.
So when you put all these things together, I think
the conclusion you get to is that on an overall basis
this is also a compelling deal for consumers and
those people who might need protection can be
protected in the deal.
So nobody can give you an ironclad guarantee, nobody
can guarantee you when you buy a stock it's going to
go up and you take those risks every day as
investors. But at least you know you have what I
think is a very likely likelihood that you have
compelling value coming and that's the risk that
we're willing to take or recommend to our
shareholders as EchoStar management.
Last question right here.
K. Zia Charlie, Karim Zia, Deutsche Bank Alex Brown. One of
the synergies you didn't mention which seems to be
one of the things driving cable consolidation is the
strategic value of scale in terms of leveraging your
distribution into developing content or developing
strategic partnerships with others. Can you just talk
about how you look at that and how much that factors
in your decision and then for you or David, can you
just talk about the antitrust filing you have against
DirecTV - what the status of that is and what your
response would be to GM's insistence that that be
taken off the table?
C. Ergen On the first question, we indirectly talk about scale
in this in the sense that we're talking about that we
do get interactive. The best place you see is the
interactive advertising scale
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because you just don't get to those kind of numbers
without the scale. There's a lot of things we don't
talk ... we didn't put everything and the kitchen
sink in here, we were just trying to give you the
highlights. There's a lot of stuff that isn't in
here. Look at professional sports. Today, DirecTV
pays for our customers even though they can't watch
it to keep us out exclusives. Obviously if our
consumer base could watch it, they would actually
sell sports at a profit, not a loss. That would be
synergy to this deal that we don't have in here. So
there's a lot of synergy on scale that we just didn't
put in here but we did put the interactive
advertising piece of it which is the largest piece of
the scale. We don't have a business plan to go out
and become our own programmer. We really want to be
Switzerland, which is we are the best distribution
network of zeros and ones to every square inch of the
United States, whether it be your home, your school,
your library. We don't know programming. Let other
people go, and we're going to go get the best prices
for you because we have some scale to go negotiate
that on your behalf and we're going to get the best
price we possibly can, but we don't have ... we're
probably not going to buy sports teams and studios
and develop our own content, at least from a video
perspective, it's possible educational content, our
data content that may come on, may make some sense to
us.
That's the gist of that. David, did you want to
address the legal issue?
D. Moskowitz Sure, the second half of Karim's question was the
status of the litigation that we have filed against
DirecTV in Denver, the antitrust action. That's been
stayed by agreement of the parties through mid-August
at which time there'll be another discussion with the
judge and we'll see how that goes. Obviously we're
hopeful that the GM board will consider this offer
favorably and there'll be a further extension and
that that litigation could ultimately be resolved
through a transaction that makes sense for both
companies, their shareholders and consumers. And
that's where we hope this will go. Obviously if it
doesn't ultimately go that way, we'd have to pursue
the litigation. We've said that we believe there's a
submarket in rural America. Charlie's addressed the
ways in which we can cover that submarket so
consumers aren't disenfranchised even in rural
America but certainly we think some of the practices
of DirecTV in the past are wrongful and we continue
to take that view, though we'd much rather resolve
this through a merger of the companies.
C. Ergen And I might add, deposition in that case would
support our regulatory approval, that that's their
position and obviously that we are the number three
and number seven markets, so they support our theory
at this point. So with that, I think ... are we off
somewhere else or are we going to be around here for
questions just for a minute?
Okay so Jason and Michael McDonald, our CFO, and
Jason Kaiser are here, so they'll walk you through. I
know that model was pretty quick, they'll walk you
through some of that. I know you'll have questions
about it.
Thank you very much for coming.
Operator Ladies and gentlemen, that does conclude our
conference for today. Thank you for participating,
you may all disconnect.
The following is a transcript of the press conference held by EchoStar on August
6, 2001.
Operator Good morning, ladies and gentlemen, and welcome to
the EchoStar Press conference call. At this time all
participants are in a listen-only mode. Later we will
conduct a question and answer session and
instructions will follow at that time. If anyone
should require assistance during this call, please
press the star followed by the zero on your touchtone
phone
Subject to future developments, EchoStar may file
with the Securities and Exchange
20
commission a registration statement at a date or
dates subsequent hereto to register the EchoStar
shares to be issued in the proposed transaction.
Investors and securities holders are urged to read
the registration statement and any other relevant
documents filed with the SEC, as well as any
amendments or supplements to those documents, because
they will contain important information. Investors
and security holders may obtain a free copy of the
registration statement and any other relevant
documents at the SEC's internet website at
www.sec.gov. The registration and any other relevant
documents may also be obtained free of charge from
EchoStar by directing such request to: EchoStar
Communications Corporation, 5701 South Santa Fe
Drive, Littleton, Colorado 80120, Attention: Investor
Relations.
And as a reminder, ladies and gentlemen, this
conference is being recorded.
I would now like to introduce your host for today's
conference, Mr. Charlie Ergen, Chairman and Chief
Executive Officer. Please go ahead, sir.
C. Ergen Thank you, operator. Good afternoon. Thanks for
joining on short notice and we'd like to discuss our
proposed combination with Hughes for you. Hopefully
you've seen the press release, you've listened to the
investor meeting so I'll make just a few comments and
then take your questions. But in short we believe the
combination of EchoStar and Hughes will bring
tremendous benefits to both GM and GMH shareholders
as well as EchoStar shareholders. And we think it's
also a great deal for consumers because of the
increased competition of cable we can offer.
Shareholders will benefit because of the mass of
synergies, our ability to compete more effectively
and I think in part because of EchoStar's management
team proven track record and able to manage this
business. GMH shareholders will receive an immediate
premium of 18% based on last Friday's closing and
then with synergies that could be an additional
$20-$26 a share, so more than double the value of
their shares. Obviously our shareholders will benefit
from the synergies as well. At the end of this
transaction EchoStar shareholders would own 34% of
the shares and GM shareholders would own 66% so
obviously they're getting almost two-thirds of the
synergy as well.
I think a lot of questions we've had about regulatory
approvals, I think there has been a lot of
speculation about regulatory, a lot of it misinformed
speculation. But we think that this combination will
receive regulatory approval in large part because it
will be good for consumers. We'll be able to access
more cities. We'll be able to go to double or triple
the number of cities that we do as an industry today,
to go out and broadcast to local channels and local
markets. We know as an industry we have to do that to
have effective competition to a cable operator in a
particular market. The cable operator in those
markets continues to, even after seven years in this
business as an industry, cable rates are going up two
or three times the rate of inflation. The only way
that's going to stop is to have a strong satellite
provider to compete with those folks. This is a
transaction that only puts together the third and
seventh largest pay TV providers. Even combined we're
only 18% of the market. You look at an AT&T or a Time
Warner, or worst yet an AT&T combined with Time
Warner or ComCast and we still would be a pretty
small fish in a big cable pond after this
transaction.
We don't own programming as a company so we have one
sole goal in mind which is to get those programming
costs down. We have no cable relationships. We can
compete day in/day out without having to worry about
whether they're going to carry our programming or not
and it gives us an effective tool to pass those
savings on to customers. So with that, I'd like to
take any questions you may have.
Operator Thank you, sir. Ladies and gentlemen, at this time if
you have a question you will need to
21
press number one on your touchtone phone and you will
hear a tone acknowledging your request. Your
questions will be taken in the order that they are
received. If your question has already been answered,
you may remove yourself from queue by pressing the
pound key. In addition, if you are using a speaker
phone, please pick up your handset before pressing
the buttons. One moment for the first question
please.
Chris Stern of the Washington Post, please state your
question.
C. Stern I was just wondering given the fact that it's
perceived that it's a higher risk that you guys won't
get regulatory approval vis-a-vis News Corp if you're
throwing anything in to make the deal, to compensate
for that risk in terms of cash or anything else or
any other proposal to acquire or guarantee to acquire
any other part of the company?
C. Ergen Chris, at this time we're not ... we did have
discussions about that sort of thing earlier with the
DirecTV management team, but they were not
enthusiastic about our offer of cash and regardless
of regulatory approval or not we were going to buy
PanAmSat regardless. So that is not in this
particular deal, but again we're confident that
regulatory approval will be forthcoming and of course
obviously in this particular case we paid a premium
for their stock and obviously the synergies are
compelling. So nobody can guarantee regulatory
approval. No CEO can sit in the stand regardless and
say you're a slam dunk deal for regulatory approval.
But I think that particularly if you compare us to
the alternatives this is going to be an attractive
deal for regulators because we're just not involved
in the cable industry and we don't own programming
and we just have one option in mind is to go compete.
And cable's getting stronger, they completed the
transition to digital and they're consolidating now
as an industry and it's a foregone conclusion that
AT&T will be sold off or broken up and sold off to
the other cable operators. And we have to be
proactive and make sure our industry gets a fair
shake and people may try to make it out as number one
and number two, this is number three and number
seven. Since you're in Washington you know that this
is really about the pay TV market, it's not about the
satellite market.
C. Stern Okay, thank you.
Operator Alex Crippen of CNBC World, please state your
question.
A. Crippen Good afternoon. What would happen to EchoStar if News
Corp gets DirecTV? Is that something you're worried
about?
C. Ergen Well, I think we would continue on doing the things
and focusing on the business that we have. I mean we
have two-thirds of all the net subscribers second
quarter this year against a tough company from
General Motors so we continue on and focus on our
business. Having said that I don't think we would be
as an effective competitor as we could otherwise be
to the cable industry.
A. Crippen Okay. Thank you very much.
Operator Chris Hudson of The Denver Post, please state your
question.
C. Hudson Thanks. The main question is was there a particular,
I know there are many events, but was there a
particular event that touched off the timing of this?
I don't know if this is in any way related to the
AT&T/ComCast offer, that that had any role here?
C. Ergen Chris, we have been trying to work with DirecTV on a
consolidated basis for about two years and we
actually had gotten a fair degree of support from a
previous management team that's no longer there and
so we've been in active discussions until the last
couple of weeks
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when we were informed that they were not enthusiastic
about the deal. So it's not something we thought up
last week or last month and the timing's particularly
critical because we are getting ready to launch our
next high powered DBS satellite for local to local
which spot beams as is DirecTV and those satellites
need to be situated so that we can get some synergy
between those two satellites. And if we wait too long
and those satellites get firmly entrenched in
different orbital locations and on different systems,
then it become much more difficult and much more
expensive to try to put these companies together when
everybody else sees the consolation in cable and
realizes that we have to put these things together.
So that's why we're being proactive about it. But
it's nothing new, we've been trying to, we made no
secret of our desire to combine with Hughes
Electronics for a long time.
C. Hudson Yeah, I recall that. But was there any influence
whatsoever from the ongoing consolidation in cable?
C. Ergen Yes, in terms of many other ... the consolidation in
cable, the fact that they pretty much deployed
digital across the country today, the fact that they
do a great job with broadband, something that we
don't do very well as a satellite industry yet. Those
are all, long story short, we know we have a
competitor that maybe was a little asleep at the
wheel five years ago, but they're not now and we know
they're getting bigger and stronger and we have to
get bigger and stronger as well.
C. Hudson Okay, thanks.
Operator Monica Hogan of Multi-Channel News, please state your
question.
M. Hogan Are you at all concerned that potential subscribers
might shy away from buying a new DBS system until
there's some sort of resolution as to who's going to
own DirecTV?
C. Ergen Not really, Monica. I guess that could be a real
minor occurrence, but I don't know that the consumer
gets educated enough about this story, primarily it's
going to be in the financial press, I'm not sure that
it really gets home to the average American. So I
only speak for EchoStar, we're confident of
generating robust sales this fall.
M. Hogan Thanks.
Operator Al Clendenning of Associated Press, please state your
question.
A. Clendenning I'm wondering about what you see employment for the
combined company out there? The figures I drew up was
you guys have about 1,100 and Hughes 9,000. What sort
of cuts would we have and what would we end up with?
C. Ergen I think there probably would be obviously some
consolidation and synergy more in the management
ranks where you have people doing the same job. I
would actually think we'd increase employment because
in our company's case we do all of our own customer
service and installation for example and they usually
use a third party for that. So we would want to
convert them over to our system of taking care of the
customers directly instead of using a third party,
that would actually increase employment. But
certainly on a management side there would be some
cuts and consolidation and that's where the big
savings are of course.
A. Clendenning Thank you.
Operator Steve Caulk of Rocky Mountain News, please state your
question.
S. Caulk Hi, Charlie. Where would this new company be
headquartered and who would run it?
23
C. Ergen That would certainly be discussed, but we would
certainly have a strong preference for Denver,
Colorado and we would have a strong preference for
the EchoStar management team and I think it has been
proven over the last three or four years [inaudible]
business [inaudible] DBS business and obviously
there's a role for [inaudible] folks as well and
certainly going to have operations spread across the
country, but we have a preference for Denver.
S. Caulk Charlie, would anybody have more voting power than
you?
C. Ergen What's that?
S. Caulk Would anybody have more voting power than you? I mean
you said you would have 30% of the vote.
C. Ergen Yes, the GM and GMH shareholders would have 66% of
the vote, so as a combined entity they would have
quite a bit more power, or more votes.
S. Caulk Okay. If this were to fall through would it be
possible to continue to pursue this with whomever
ended up with Hughes Electronics? If that were News
Corp for instance, could you continue to negotiate
with them?
C. Ergen I don't think that would be likely. I think any deal
is going to take maybe as long as a year [inaudible]
no matter who ends up with this company so I think
the longer it goes the less likely it is. If you
could get some of the synergies that we're talking
about without added cost, so we should have done this
deal months ago and [inaudible] again.
S. Caulk Thanks, Charlie.
Operator John Haggins of Broadcasting & Cable, please state
your question.
J. Haggins Two items. One could you describe a little bit better
for us the discussions you had with DirecTV over
recent months? And, two, I guess the big antitrust
issue to me would be the rural areas where some areas
where the satellite companies are the only video
outlet providers and the other areas where the cable
is, 20-30 channels isn't much of a competitor.
C. Ergen I guess I would describe the conversations with
DirecTV over the past several months as cordial
conversations with not much input from them. Not a
lot of enthusiasm from them, but they listened. We
did not have senior executives of General Motors or
board members from General Motors, we did have a
representative from General Motors in most of those
meetings. Obviously those did not turn into any kind
of serious talks which is why we've now gone to the
General Motors level to make sure that all the
information going to them is unfiltered and it's out
there in the public domain so that there's nothing
hitting here.
J. Haggins What kind of filter do think was being put on your
information?
C. Ergen I have no idea of any filter was being put on it. I
can't speculate on that. I just know that the
powerful economics of this deal I thought would have
brought a more enthusiastic response from General
Motors. But we can't take the chance that they
haven't been able to see some of the things that
we've seen and we need to be sure that we're talking
to them directly.
The second part of your question ... I agree with you
that from a regulatory point of view that the major
safeguard, the concern here would be rural companies
who have no access to cable ... rural customers who
have no access to cable. That's only a handful of
customers, a
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handful, several million as cable passes about 95% of
the homes, but I think you have to put safeguards in
place. I think it's very easy to, I think we
certainly are willing to go to a nationwide pricing
scheme where the people in rural America get exactly
the same price as the lowest customer in America
where there's robust competition with the incumbent
cable operator. So I think that protects the
customer, but as an added benefit because we put
these two companies together, that same rural
customer is going to be able to get high speed
internet broadband access through satellite. That
same customer's going to be able to get high
definition television. He may be able to get his
local to local channels from a city, he may be in
rural Colorado and be able to get the Denver channels
because we're able to efficiently do it with these
combined combinations. So it's a better deal for
customers overall in rural America and we can
safeguard them against any abuses by going to
nationwide pricing. That's the kind of thing,
positive dialog I think we can have with regulatory
authorities and something that I think some of the
skeptics haven't taken into consideration.
J. Haggins Thanks.
Operator Christine Nuzum of Dow Jones Newswires, please go
ahead.
C. Nuzum I was wondering if there's a possibility of you all
adding cash to the bid? I know that originally Hughes
had wants cash offered to shore up their balance
sheet.
C. Ergen We thought they wanted cash too and we actually
offered them $5.5 billion of cash on our previous
negotiations with them and again they weren't
enthusiastic about that. So that's not to say that if
General Motors came back and wanted to fine tune a
proposal and it has an element of cash in it that's
certainly something that we would entertain and have
discussions on.
C. Nuzum Thanks.
Operator George Szalai of Bridge News, please state your
question.
G. Szalai Hi, Charlie, a quick question on the timing of the
event you expect going forward. How long do you think
it's going to take to hear back from the GM board and
how long would you expect the regulatory review to
take if GM really decides to take you up on the
offer?
C. Ergen We'd hope we hear back something very shortly and
hopefully it's positive so we can have further
discussions. We're certainly prepared to meet any
time, any where. From a regulatory point of view I
think that anybody ... I think the regulatory process
is about the same no matter who would acquire, use
electronics and that review period is probably
somewhere between six months and a year. I wouldn't
think our particular deal is as complicated for
example as AOL/Time Warner was which took exactly one
year to the day, so I think it will be less than a
year, but you never know. You don't have control of
that process and I think these kinds of things
historically have taken about nine months.
G. Szalai One quick follow up. I was wondering has News Corp
approached you guys at all in offering any kind of
concessions for you guys to back away from any offers
or has there been no talks like that at all?
C. Ergen No, we're not engaged in any talks with News Corp.
C. Szalai Thank you.
Operator Luke Collins of Australian Financial Review, please
state your question.
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L. Collins Mr. Ergen, how are you?
C. Ergen Good.
L. Collins To follow up on that last question, there's
been a lot of other numbers used, you talked about
licensure with Mr. Murdock? Could you characterize
the state of the relationship and in that respect why
for example a deal similar to the one you were trying
to strike with Direct might not have been struck
between Hughes and yourself?
C. Ergen I think we have a very cordial relationship in terms
of Mr. Murdock and myself and I can only speak for
myself, but I highly respect Mr. Murdock and what he
has accomplished and how he's built his business and
the way he has been able to take a lot of chances and
do a lot of things that people didn't think he could
do. And I've learned a lot from my association with
him and still value that. Having said that, we have
to do what's good for our shareholders and he has to
do what's good for his shareholders and we probably
both see a very good asset in Hughes Electronics that
we both would like to have for our shareholders and I
think in some ways we think alike. And that sometimes
makes for conflicts in the business world, but that
is what it is. Just because I happen to respect Mr.
Murdock very much doesn't mean that I wouldn't try to
do the best thing for my shareholders.
L. Collins Yeah. And do you think ... there has been a lot of
talk about the way to market for the pay TV industry
market [inaudible]. Do you think that the argument in
relation to the potential News Corp deal with Direct
just caps to some degree News Corp's large presence
in the freeware market which obviously alters the
balance in terms of the total U.S. TV sector.
C. Ergen I think ... you're talking about regulatory?
L. Collins Yeah.
C. Ergen I think the key question for us is do regulators look
at the pay TV market overall or are they just saying
DBS is the only pay TV market out there? And
obviously if they look at it overall, again the third
and seventh largest operators that's not going to be
a major problem. Even if they look at the market in
rural areas we think we have some ways to accommodate
the safeguards there and we think that's the way to
look at it. News Corp would probably be a whole
different set of regulatory issues. The biggest issue
is would News Corp really have incentives to compete
against cable? They own the programming, they would
only own a minority position of DirecTV so they would
have a huge incentive to raise prices of programming,
they'd have a huge incentive to work with cable
operators who have 68 million subscribers for them
versus the 10 million in DirecTV. And of course they
already own broadcasting, now two stations with
KrissKraft in some markets, they own studios, that's
a formidable market tower. It would be a whole
different set of issues and in terms of foreign
ownership in terms of News Corp not being an American
company yet owning so much broadcasting so that would
just be different issues that certainly would go on
for a long period of time. And I don't think anybody
at News Corp could guarantee regulatory approval just
as I don't think we can. Having said that, regulatory
approval we think in our case would be forthcoming.
L. Collins Last question. How have the fund managers reacted
this morning?
C. Ergen I don't actually know. I've been in meetings the
whole time, but I heard that our stock has held up
particularly well given what normally happens in
mergers of this case. And again we just presented our
information to the analysts and I think it's going to
take a few days for people to digest the information
and they're either going to view this as credible or
they're not and obviously we think it's credible. And
I think if we get positive response from General
26
Motors that the markets will react well, both at the
GMH level and at the EchoStar level.
L. Collins Thanks.
Operator Justin Cole of AFX News, please state your question.
J. Cole Hi, Mr. Ergen. I was just wondering, apart from the,
you highlighted what you see some of the benefits to
rural consumers in terms of how regulators would look
at this, but are there any other areas that you see
that would sort of benefit your case going before the
regulators?
C. Ergen Well sure, and by the way this is the last question I
can take unfortunately. But we can double or triple
the market that we go into and again where we don't
offer the local broadcast channels via satellite, in
other words your customer has to use an off antenna
which is a 1950s technology that customers don't want
to use anymore then we're not truly effective
competition against cable and while we get a few
customers because there are some people who will put
up an off antenna or just not watch local broadcast
stations, it's not nearly a competitive threat to
keep cable rates down. Let's just take an example.
For the last 10 years, for the last seven years while
we've been a DBS industry, cable rates have gone up
at 2 1/2 times the rate of inflation even though we
had hoped to have effective competition to them. We
just haven't been able to hold those rate increases
down. The only way we're going to be able to do that
is to be able to compete on an equal playing field,
get critical mass and scale and get the same kind of
programming prices that they're getting and add
things like local cities for local channels which
takes capacity to do it.
The second thing we've got to do is go out and give
addition services to consumers that they can't get
from cable today. Those kind of services are things
like high definition television. You're never going
to see high definition television in the United
States unless it's a local broadcaster in the cable
industry because they don't have an incentive to go
out there and put it up there, but we will do that
via satellite and we won't discriminate against you
whether you're in rural America or in the city
because our signal goes everywhere. And then you have
things like satellite broadband and interactivity and
other things that we can, specialty channels,
educational channels, foreign language channels,
things that we can do with the capacity that we
otherwise wouldn't be able to do and that may not be
available on cable because there's not a lot of money
in it, but it's a good customer service and gives you
good customer retention.
Thank you very much for joining us. I hope we had a
chance to answer most of your questions and our PR
representatives and so forth will be available for
you if you didn't get all of your questions answered.
Thanks a lot.
Operator Ladies and gentlemen, this does conclude our
conference call for today. Thank you for
participating, you may all disconnect now.