PARIS — Satellite television pioneer Charlie Ergen’s EchoStar Corp. has won the bidding to purchase satellite broadband provider Hughes Communications for about $2 billion including Hughes’ debt, with the cash portion representing a 31 percent premium on where Hughes stock was trading before rumors of its sale began pushing the price up, the two companies announced Feb. 14.
Englewood, Colo.-based EchoStar, which Ergen separated from his satellite television provider Dish Network in an effort to diversify into new businesses, will now own the world’s biggest manufacturer of satellite broadband hardware, as well as a company that has made consumer satellite broadband in the United States a core business.
Germantown, Md.-based Hughes owns the HughesNet commercial satellite broadband service, which is migrating its customers to Ka-band via the in-orbit Spaceway 3 satellite and plans a major capacity increase with the Jupiter satellite scheduled for launch in 2012.
The HughesNet service counted 524,000 subscribers, each paying an average $75 per month in fees, as of Sept. 30, 2010, Hughes said in a November investor presentation. For the 12 months ending Sept. 30, the consumer business in North America generated $463 million in revenue. Hughes’ total revenue for that 12-month period was $1.02 billion.
Hughes leases Ku-band capacity on more than a dozen satellites covering North America. The company is using normal subscriber turnover, or “churn,” to reduce the amount of leased capacity it needs by loading almost all new subscribers onto its Spaceway 3 satellite. Hughes has ordered another satellite, called Jupiter, with 10 times Spaceway 3’s capacity.
Barrett Xplore, a Canadian consumer broadband service provider, has agreed to lease 13.3 percent of Jupiter’s 100-plus gigabits per second of capacity for about $16 million per year over the satellite’s 15-year life.
EchoStar has agreed to pay Hughes shareholders $60.70 per share, compared with a share price of $46.43 on Jan. 19, before investors bid up Hughes shares in anticipation of the company’s sale by private equity investor Apollo Management IV L.P., which owns a majority of Hughes.
EchoStar will also be refinancing Hughes’ debt, which as of Sept. 30 stood at $719 million. The only portion of the debt not to be refinanced will be a $115 million loan backed by the French export-credit agency, Coface, which will transfer to EchoStar once Coface approves the arrangement.
“We are very pleased to announce this transaction as it brings together the two premier providers of satellite communications services and delivers substantial value to our shareholders,” Hughes Chief Executive Pradman P. Kaul said in a Feb. 14 statement. “By combining Hughes’ operational strength … with EchoStar’s expertise in cutting edge satellite video technology, customers will benefit significantly from our shared institutional excellence.”
EchoStar President Michael Dugan said the EchoStar-Hughes combination “will create a powerful leader in video and data transport.”
Top managers at Hughes secured change-of-control provisions in their employment contracts that added a combined $26.9 million to their pay packages just hours before their company’s purchase by EchoStar.
In a Feb. 15 filing with the U.S. Securities and Exchange Commission (SEC), Hughes said the payouts, agreed to Feb. 13, will occur in two steps. One will be made as soon as the EchoStar purchase, also agreed to Feb. 13, is approved by U.S. regulators, which is expected in the coming months.
Once that occurs, five managers at Hughes will receive a total of $13.45 million, with $5.35 million going to Kaul, $2.4 million to Executive Vice President T. Paul Gaske and $1.9 million each to Chief Financial Officer Grant A. Barber and executive vice presidents Adrian Morris and Bahram Pourmand, according to the SEC filing.
A second, identical payment will occur six months later, the company said, adding that the compensation is to repay these executives for their efforts in finding a buyer for Hughes.
Executive employment contracts that trigger cash or stock payouts in the event of a change of control are not uncommon, although most are not tied so closely in time to a specific acquisition.
EchoStar and Dish Network are in the middle of a competition with hedge fund Harbinger Capital Partners of New York to be the first to assemble the necessary capital and licenses to offer a hybrid satellite-terrestrial mobile broadband service in the United States.
Dish Network is bidding to take over bankrupt mobile broadband company DBSD of Reston, Va., which has a license to offer a hybrid satellite-terrestrial service in the United States. Dish has offered $1 billion to purchase DBSD. EchoStar has invested in TerreStar Networks, also of Reston, which also is in Chapter 11 bankruptcy. TerreStar and DBSD have both launched S-band satellites that are healthy in orbit.
Harbinger is trying to find co-investors for its LightSquared venture, which has a nearly identical license to the one held by DBSD, with the major exception being that LightSquared operates in L-band.
Established Fleet Operators Might Make Play for Hughes
Inmarsat Expects Tidy Profit from LightSquared Spectrum Deal