Doubts Abound on DirecTV Deal.

While General Motors Corp. last week confirmed that it has once again entered into talks to sell its Hughes Electronics Corp. unit to News Corp., some industry observers argued that the proposed marriage would be inferior to at least two other outcomes for Hughes.

The first of those possibly higher-value outcomes would be to sell Hughes to EchoStar Communications Corp., the nation's No. 2 satellite-to-home broadcaster behind Hughes' DirecTV.

The second option would be to spin-off Hughes as a separate, independent company.

"There are strategic advantages to both a deal with News Corp. or with EchoStar, but the Hughes shareholders simply don't care for a merger with News Corp.," said Rohit Shukla, CEO of the L.A. Regional Technology Alliance. "They want to be spun off. They're getting nothing from the parent now. They're capable of going alone."

Analysts say that Hughes Chairman Michael Smith, possibly in an effort to save his job, has been exploring some kind of spin-off in which GM could still garner billions of dollars.

But the deal that seems to garner the most enthusiasm from industry observers is one that would marry Hughes to EchoStar.

Just after GM made its announcement last week confirming it had reinitiated talks with News Corp., Charles Ergen, CEO of Littleton, Colo.-based EchoStar, told analysts in a conference call that "for shareholders, the greatest synergy and therefore probably the value is some kind of combination between (Hughes) and EchoStar."

Ergen, who said he expressed an interest in Hughes last year, told analysts that he would be keeping an eye on talks between GM and News Corp.

Meanwhile, Smith has said publicly that the News Corp. bid is inferior to any of the other offers and would be a sell-out if consummated. "There's not enough value in the deal. End of story," Smith reportedly told an investors' conference in late March.

In a letter sent to Hughes employees last week, Smith expressed frustration with the talks, which have been on-again, off-again for several months.

"The process we are engaged in involves many complex variables, making progress toward closure much slower than any of us would like," Smith said in the letter, which was filed with the Securities and Exchange Commission.

News Corp.'s Rupert Murdoch, in turn, has made no secret about his disdain for Smith's leadership. With Murdoch's long-term pursuit of a truly global satellite network, it is unlikely that he would relinquish much control to the current Hughes team, making for a less-than-cheery merger. (In fact, Murdoch's earlier insistence that News Corp. run day-to-day operations of Hughes derailed the initial merger talks. Analysts have said that, if the merger pans out, Smith would be out.) Officials at News Corp., GM and Hughes declined to be interviewed.

The deal is complicated by die fact that GM owns 32 percent of Hughes' tracking stock and all of the unit's assets. Therefore, directors at GM, Hughes and News Corp. would have to approve the merger, along with GM and Hughes shareholders.

In separate statements, the companies said they are working on an agreement that would create significant shareholder value.

But the amount of that "value" is sketchy to analysts.

"At the end of the day, there would not be many synergies between Hughes and News Corp.," said one satellite analyst who spoke on condition of anonymity. "The question is: Why hasn't GM explored a transaction with EchoStar? That's where the synergies are."

On the surface, a merger between Hughes and News Corp. seems like it would be a heavenly marriage. As its credit rating comes under review and as its automobile profits dwindle, GM could use the cash. Hughes' DirecTV, with its nearly 12 million U.S and Latin American subscribers, would get a global footprint with Murdoch's Sky Global Networks, which has no U.S. presence. Murdoch, who has been building his global satellite network for two decades, claims to have tens of millions of subscribers in European and Asian markets. DirecTV would seem to be the icing on the cake.

Finally, the new News Corp.-Hughes entity would be valued at well over $50 billion.

"There's a case to be made for the synergies (between News Corp. and Hughes), but it doesn't even compare to the synergies with EchoStar," said a large EchoStar shareholder who also spoke on condition of anonymity.

There would be "tremendous cost-cutting opportunities and revenue synergies," the shareholder said, because EchoStar is strong in the suburban and rural markets, while DirecTV is strong in the urban market and has largely ignored rural subscribers.

"You would be marrying two different distribution systems to make a much better one," die shareholder said.

GM, which is apparently calling the shots in merger talks, is leery of EchoStar. The conservative automaker is concerned that a merger between No. 1 DirecTV and No. 2 EchoStar would run into time-consuming Federal Communications Commission regulatory hurdles. In addition, DirecTV and EchoStar have been bitter rivals for years, and a relationship between Smith's team and Ergen's team could be rocky.

Even though Smith reportedly broached the idea of a merger last year with General Electric Co.'s NBC television network, SBC Communications Inc. and Microsoft Corp., it ultimately came down to EchoStar and News Corp., according to the EchoStar shareholder.

"If it was a choice between doing nothing and doing a deal with News Corp., then News Corp. would be the best choice, but EchoStar is another option," the shareholder said. "It's the deal that makes die most sense."

Although unlikely, GM could also decide to do nothing and hold on to Hughes.

There are other giants at the table. Microsoft has agreed to help finance the potential News Corp. deal with a rumored $3 billion in exchange for some access to the new entity's vast audience. In 1999, America Online, before it was AOL Time Warner, invested $1.5 billion in Hughes. Those two companies also agreed to develop set-top boxes that can provide DirecTV and AOL TV. AOL's high-speed Internet service, AOL Plus, will soon be available over the Hughes DirecPC satellite network.