All - Excellent story on stuff going on behind the scenes at DISH:
Fine journalism in a fine publication.
afr.com.au
text:
The Man Who Outfoxed Rupert Murdoch
By Neil Chenoweth
It took an old poker player in Nike sports shoes to beat Rupert Murdoch.
Losing is a rare experience for Murdoch. His superb deal-making skills have put his News Corporation on a two-year winning streak that has added $29 billion to the value of the company since 1997.
But Murdoch made a spectacular blunder last November when News and its partner, MCI Worldcom, exchanged their US satellite interests for $US1.17 billion in shares in rival satellite broadcaster Echostar Communications.
With settlement of this deal only weeks away, the conditions that Echostar chairman Charlie Ergen built into the sale contract have cost News and MCI $6 billion.
Echostar was trading at $US39 a share when the deal was struck and it was announced that News and MCI would receive 30 million shares worth a total of $US1.17 billion ($1.8 billion), giving them just under 40 per cent of Echostar.
But just how many shares News and MCI would receive was to be decided on Echostar's share price when the deal was settled. If the stock price was up, News and MCI would receive proportionately fewer shares, to keep the payout level at $US1.17 billion.
With Echostar continuing to lose money, this seemed unlikely. The negotiators were more concerned with building in safeguards for News and Echostar in case the stock fell.
So there was some protection for News if Echostar dived, but none if the stock price rose. After all, who could have guessed, besides Charlie Ergen, how high Echostar stock would go?
On Tuesday night, Echostar stock closed at $US158.38 almost four times the price at which the deal was struck. At this level, News and MCI will receive only 7.4 million Echostar shares, or 14 per cent of the company, with 2.3 per cent of the voting stock.
News wrote off $616 million as an abnormal loss on the deal last December before Echostar's latest stock rise.
This actual loss, together with the opportunity cost that the lower share allocation represents, means that News is down $5 billion on the deal. MCI is down another $1billion.
It seems unlikely that Murdoch was fully aware, at the time the deal was struck, that Echostar was only months away from a string of new product releases.
Ergen, who has more escape acts than Houdini, turned his share price around this year in part on the basis of the deal he had negotiated with Murdoch, and favourable law changes approved by Congress.
But the biggest rise came after Ergen improbably managed to turn his satellite company into an internet stock, unveiling a new set-top box that offers high-speed internet access and webTV via the satellite dish.
It also contains a digital recorder that can record up to eight hours of material and which can be used to record not only television programming but also near-video-on-demand.
Echostar stock kicked again this week after America OnLine committed $US1.5 billion to Echostar's bigger satellite rival, DirecTV, to build a similar system and a rival to webTV.
The internet bubble that Ergen has tapped into has robbed Murdoch of any upside he could have made from this deal. It underlined the scale of the humiliating defeat that he has suffered at the hands of Ergen.
Most coverage of Murdoch in the US has focused upon his deals with John Malone, the man who built TeleCommunications Inc (TCI) into America's biggest cable company.
While Malone has become Murdoch's alter ego, in three bruising encounters, Charlie Ergen has become Murdoch's nemesis.
Ergen first came to Murdoch's attention 312 years ago, on a cold January day at the Washington offices of the Federal Communications Commission.
The FCC was auctioning off one of the three key satellite licences that can be used to beam direct broadcast satellite (DBS) services across the entire United States.
The electronic auction for the 110 West Longitude licence was to be a one-on-one clash between MCI and News Corporation, whose joint venture was called ASkyB, and the cable companies, led by John Malone.
Until then, the FCC had given out satellite slots free. The other two DBS slots were already dominated by General Motors' satellite subsidiary DirecTV, and Echostar, so this was the only way into the DBS business for Murdoch or Malone.
After some spirited bidding, John Malone threw in his cards at the astonishing bid price of $US297.7 million, leaving Murdoch the winner.
At least, that is the way it should have gone ... only at this point Murdoch realised that the other bidder in the auction, an unknown Denver businessman called Charlie Ergen, wasn't going to go away.
Ergen says he has wanted to get into satellites ever since he was four, and with his father one night in Tennessee watched the first Sputnik tumble through the night sky above him.
According to research through Lexis Nexis, Ergen grew up to be a financial analyst in Texas at snack-food group Frito-Lay, but he is better known for his exploits at blackjack and poker.
"I don't think I've ever seen Charlie with a suit and tie," Al Angelich, one of Echostar's two outside directors, told the Rocky Mountain News. "He wears sweaters and button-down collar shirts and Nike. That's Charlie."
Halfway through a poker game one night in 1980, he decided to move to Denver to sell satellite dishes. He and his wife and poker partner James DeFranco, with $US50,000, set up a business selling three-metre-wide dishes for $US25,000 apiece out of a Denver storefront.
Demand was low, and Ergen says they were out of money and delivering one of their last two dishes when a gust of wind flipped it off the truck and smashed it. Only the successful sale of the last dish saved the business.
In time, Ergen turned to making satellite dishes himself, eventually becoming the largest dish manufacturer in the US. He also began picking up DBS satellite slots.
When he went to the FCC auction in January 1997, Ergen still had not launched his DBS service, and he had no backers and little money.
But he and DeFranco knew a lot about satellites and about playing high-stakes card games.
"Both of us felt we'd been training our whole lives to be in a big poker game with people like Rupert Murdoch and John Malone," Ergen said later.
So after Malone and TCI dropped out of the auction, Ergen just kept on raising the bid.
Consternation reigned in the ASkyB bidding room. How could Ergen afford to keep lifting the price? He must have a financial backer behind him. Or was he just bluffing?
When questioned, Ergen said he really would have been able to come up with the money if he had won the auction though this is a bit like asking a poker player who has just stared down his opponent just what his cards were.
By the time Ergen folded, he had forced MCI and News to lift their bid to $US672.5 million an incredible price to pay for a satellite licence against well-established rivals, with a two-year lead time to launch any new satellite.
It seems likely that the auction marked the beginning of the end of the alliance between Bert Roberts at MCI and Murdoch.
A year later, MCI had backed out of the alliance, and Murdoch suddenly needed to find $US4 billion to pay for launching his DBS operation.
After trying everything else, Murdoch went back to Ergen, who had now launched the Echostar service, and convinced him to merge Echostar with ASkyB as equal partners.
Murdoch and Ergen unveiled the deal at an analysts' conference held by News on a sound stage at its Twentieth Century Fox studio in Hollywood, on February 24, 1997.
Sky, as the new venture was to be called, would offer American subscribers 500 channels of pay- television, including local free-to-air programming and 70 channels of near-video-on-demand.
"I'm not interested in competing with cable, I want to eliminate cable," Ergen said at the time.
"The cable guys will be calling for Dr Kevorkian," said Preston Padden, then the head of ASkyB. Cable operators called the merger "Deathstar" and went into panic mode, but they did not take to euthanasia.
Murdoch dumped Ergen nine weeks later, under crippling pressure from the cable operators which carry his programming. Instead, Murdoch sold his satellite interests into the cable companies' Primestar operation.
Ergen says he kept the agreement with Murdoch on his desk for months afterwards, wondering every day what might have been.
The move triggered a dynamic rise in the News share price, which has risen from $5.67 to last Friday's close at $13.49. In the end, dumping Ergen has been worth $29 billion for News Corporation. But it has set up a terrible revenge for Ergen.
At the time, Ergen sued News for $US5 billion, but Echostar seemed to be mortally wounded. Overwhelmed by debt, haemorrhaging on its satellite operations and without a friend in sight, Ergen had just weeks to find some more funding before Echostar arrowed into the ground.
Echostar survived, but Primestar didn't. Last year the US Justice Department vetoed Murdoch's deal with Primestar.
In the end, Murdoch was left with a couple of satellites, a satellite licence, and only one person he could sell them to ... Charlie Ergen.
In last November's deal, rather than shared control, Ergen offered Murdoch only 40 per cent of Echostar, and 8.7 per cent of the voting rights.
Just how little love there is now between Murdoch and Ergen was demonstrated by the terms of the deal. It was an unforgiving contract, in which the underlying theme seemed to be revenge.
"Rupert had no choice but to come back and deal with Charlie ... and he held his hands to the hotplate," one analyst told The Sydney Morning Herald at the time.
At the press conference afterwards, News Corp's chief operating officer, Peter Chernin, made light of the dispute between News and Echostar. But for News and MCI, this was a lose-lose deal. They would lose whether the Echostar share price went up or down.
If Echostar stock went up, it would be tough luck for News and MCI because they would get fewer shares.
If Echostar stock went down, it would be tough luck for News and MCI again, because they would not get any more shares to compensate.
However, there was a bottom in this deal, so that if Echostar stock fell off a cliff and dived from $US39 to below $US15, then News and MCI eventually would receive more shares to ensure that they got at least $US450 million worth of stock.
This was sort of good news. News and MCI were always going to lose money on the deal, but this way they wouldn't lose more than $1.1 billion.
While there was a bottom to the deal, there was no ceiling. Who could have guessed, besides Charlie Ergen, just how high Echostar shares would go?
Last week, Echostar filed notice that it had received the last of the government consents it required to finalise the deal.
The settlement will be calculated on the average price of the previous 20 days' trading.
With Echostar stock on a streak, News executives can only watch as the average settlement price ratchets up day by day, and wonder, like Charlie Ergen, what could have been.
(Research for this article accessed via Lexis Nexis.)
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