DirecTV in the News

Hughes - Defense to Satellite TV

LOS ANGELES (Reuters) August 23, 2000 - About six years ago, Michael Armstrong, then chief executive of Hughes Electronics Corp., proclaimed to a Los Angeles City Council meeting that an 18-inch satellite dish would restore growth at the billion-dollar behemoth of U.S. defense.

"Yeah, right," seemed to be the response of the 20 or so people in the chamber, including the council members, who hadn't a clue about what Armstrong was predicting.

Los Angeles was mired in recession and defense companies like Lockheed Corp., Rockwell Inc. and Hughes -- all among the city's top employers -- were closing plants and cutting jobs.

The council wanted to hear what Hughes was doing to save those jobs, the salaries and tax dollars that came with them. Armstrong's satellite dish, which was about as big as a pizza, seemed like pie in the sky.

But New York financier Carl Icahn's disclosure, last week, that he was buying up large chunks of stock in General Motors Corp., which controls Hughes, underscores just how tasty that satellite pizza dish has become in six years.

Wall Street believes GM's stock, trading just under $70 a share, is undervalued and much of its hidden value is tied to the prospective growth for Hughes' satellite businesses. In particular, analysts see its DirecTV television delivery service as a primary engine of growth.

The locals laughed in its infancy, but DirecTV is now the top provider of satellite TV in the United States with some 8.7 million subscribers, up from 7 million in June 1999.

In a recent research report, Goldman Sachs analyst Adam Simon said he believes DirecTV's subscriber base could grow as high as 15 million by 2005, which ``may prove conservative.''

Down the road, added services like interactivity, more pay-per-view events and movies and digital recording features, ''will be catalysts for continued subscriber growth by making DirecTV's offerings more competitive with cable,'' Simon wrote.

Moreover, satellite TV growth, in particular, is being fueled by recently enacted laws that allow providers to deliver local TV channels much like cable TV does.

DirecTV is now Hughes' top growth engine, leading the company to over $5.5 billion in 1999 revenues and $3.5 billion in 2000's first six months, up about 60 percent from the $2.2 billion in the first six months of 1999.

Merrill Lynch recently issued a research report projecting total year 2000 revenues of $7.6 billion.

That type of growth has made DirecTV a rumored takeover target, and the takeover talk has added further fuel to the notion that Hughes's and parent GM's shares are undervalued.

Hughes Becomes Takeover Target

One rumored acquiror is global satellite TV provider News Corp. Ltd. (NCP.AX), which would extend its coverage into the United States from current bases in Britain and Asia.

The nation's largest cable TV operator, AT&T Corp., also is seen as a possible acquiror, adding satellite delivery to its cable systems. Armstrong, incidentally, jumped ship from Hughes to AT&T a couple of years ago, and is responsible for AT&T's move into cable. Michael Smith now runs Hughes.

An acquisition-minded entertainment giant such as Walt Disney Co. also has been tossed as a possible acquiror because it could secure new distribution for content producers like the ABC TV network, ESPN all-sports channel and their collection of popular Web sites.

Like others, Disney has shown concern over the proposed merger of Internet powerhouse AOL Inc. and the United States' No. 2 cable TV operator, Time Warner Inc., owner of Warners Bros. movie studio and the WB TV network.

Some of the opponents of that deal argue that as broadband cable, which allows for two-way communications over a TV set, is piped into U.S. homes, a combined AOL/Time Warner might block access to rivals' networks and channels.

Acquiring Hughes and DirecTV would give players like Disney, Viacom Inc. or News Corp. an added distribution system -- unprotected by a rival -- over which it could offer its own content and interactive services.

Interactive services like shopping at home, browsing for information, chatting and e-mail, in turn, provide new ways to boost advertising and other revenues.

Business-to-business broadband communications may be one unseen growth driver at Hughes as its Hughes Network Systems division builds private, broadband communication networks for corporate clients. The division generated $1.3 billion of Hughes total sales in 1999, and that figure is growing.

Finally, Hughes' 81 percent-owned PanAmSat Corp. is providing satellite delivery of video and data for a host of broadcasters and others who are expected to ramp-up services as the market for two-way communications grows.

A key to all this talk of growth prospects will be when Hughes finally completes the planned sale of its satellite manufacturing business to Boeing Co. That sale was planned for completion this summer, but has been delayed.

When the day does come, however, Hughes will have shed the last unwanted remnant of its old defense days, and one more piece of Los Angeles' old defense industry will have been overcome by the burgeoning communications business.