Satellite Showdown

By ADAM COHEN

Charlie Ergen made his first run on the satellite-television market in the '80s, and he did it by truck. Ergen, with his future wife Candy and a poker buddy, Jim DeFranco, drove one of their two satellite dishes to Colorado, hoping his fledgling service would score big in a land of tall mountains and bad TV reception. A stiff wind blew their trailer into a ditch, ruining the dish and leaving them with only one. As it turned out, one dish was enough. Ergen used it to build EchoStar, now the nation's second largest satellite-TV company.

Ergen isn't hauling dishes anymore, but he is still the scrappiest guy in satellite TV. Last week he made a $32 billion all-stock bid for DirecTV, the largest satellite company in the U.S. The offer puts Ergen in an uphill battle against Australian-born media mogul Rupert Murdoch, who was on the brink of clinching his own deal for DirecTV. If Ergen outmaneuvers Murdoch in the battle that's likely to unfold in the next few weeks, he will control most of the nation's satellite sets. If he loses, the move--like a well-executed bluff--may still work to his advantage.

DirecTV--owned by General Motors' Hughes Electronics Corp.--would be the missing piece of the planetary puzzle for Murdoch's News Corp. Its Sky Global Networks has 85 million subscribers spread across Europe, Asia and Latin America. DirecTV would deliver the U.S. in a bold way. The addition of DirecTV's 10 million households would make Murdoch No. 1 in satellite TV in the U.S., and No. 3 in pay TV, behind only AT&T's cable operations, with more than 14 million cable subscribers, and AOL Time Warner, with almost 13 million. (AOL Time Warner is the parent of TIME.)

DirecTV has been an elusive prize for Murdoch. Hughes chairman Michael Smith long spurned his advances, an impediment that disappeared in May when Smith did: he was recently replaced by Harry Pearce, a top GM executive seen as sympathetic to Murdoch's bid. Just when the deal seemed imminent, though, Ergen made his play.

Murdoch has several factors in his favor, beyond possibly friendly management at Hughes. With two deep-pocketed backers behind him, Microsoft and Liberty Cable's John Malone, Murdoch could hand over as much as $7 billion in cash. In mergers and acquisitions, cash is king. (Ergen has said he would consider adding some cash.) Most significant, there's considerable skepticism in the industry that antitrust regulators would let Ergen combine the nation's two largest satellite companies.

But the wily Ergen, a Tennessee native and a onetime professional gambler, isn't giving up. His initial offer gave shareholders an 18% premium (that bonus decreased when EchoStar stock fell on the news), an amount that forced Hughes' management to take notice.

And Ergen brushed aside antitrust concerns, arguing that the relevant market is not satellite TV but all of pay TV--including satellite and cable. EchoStar currently has 6 million subscribers (who pay between $21.99 and $69.99 a month in programming fees). If the deal were to go through, the new company's 16 million subscribers would be only slightly more than the customer base of No. 1 cable company AT&T.

Even if Hughes' management would like Ergen to just go away, it has to proceed with caution. It is legally required to go with the highest bid, and at least four shareholder lawsuits have been filed charging that GM and Hughes failed to hold a fair auction. "Ergen's incredibly passionate about winning," says Jimmy Schaeffler, chairman of the Carmel Group, a media and technology research firm. "If people won't deal with him at the table one on one, they'll deal with him in front of their shareholders or in the courtroom."

Ergen could win even if he loses. At the very least, his offer is likely to slow Murdoch's entry into the U.S. market, and it may force News Corp., already heavily indebted, to up its bid. There's still an outside chance Ergen could walk away with the big prize. The odds look long--but no longer than when he was down to his last satellite dish, fighting a blustery Colorado wind.