SATELLITE BROADCAST COMPANIES TO MERGE.

Byline: James Sterngold The New York Times

News Corp. and Echostar Communications Corp. announced Monday that they were combining their direct broadcast satellite businesses into a company that could provide a major challenge to the cable television industry.

The new company, which will adopt the Sky brand name from News Corp.'s global satellite broadcast business, will be valued initially at $2 billion. Echostar's shareholders will own 50 percent, News Corp. will own 40 percent and MCI Communications, now a large shareholder in News Corp., will hold 10 percent of the new company.

News Corp. will be putting its American Sky Broadcasting subsidiary, with satellites, cash and transmission stations valued at $1 billion, into the new company.

The two companies contended that the key advantage of the venture over other satellite broadcasters and the cable companies would be the fact that it would beam 500 channels of high-quality digital television to homes along with local stations.

Previously, direct broadcast satellite companies did not have the ability to include local stations, the companies said, and the cable companies have not had the high-quality picture and sound of a digital system. A digital broadcast subscriber can now receive, for example, cable channels like HBO and MTV, but cannot get local news and sports.

That is one reason why the cable companies currently have about 65 million subscribers in this country, while the direct broadcast satellite companies have fewer than 6 million. Echostar is the third-largest direct broadcast company, having signed up 430,000 subscribers since starting its business in March.

The new company will be able to include local service because of the large number of satellites and transponders it will control, as well as new technology, its executives said.

Asked the significance of the announcement, Rupert Murdoch, the chairman of News Corp., said in Los Angeles on Monday, ``Competition, in a word.''

Charles Ergen, Echostar's chief executive, added: ``What this does is enable Echostar Sky to present the first real alternative to cable. This is not complementary to cable. This is an alternative to cable.''

Rumors of such a deal have been circulating for some time, and Echostar's stock price rose 20 percent, or $3, to $18 Monday before trading was stopped. Echostar's share price has fallen in recent months in line with with far less enthusiasm by investors in the direct broadcast business as a whole. Before Monday, Echostar was valued by the market at about $700 million, which means it will be receiving effectively a $300 million premium in the deal.

American depository receipts of News Corp. rose 62.5 cents, to $21.25. Each ADR represents four shares of the Australian company. The merger was not announced until after the market had closed for the day.

While there was some skepticism about how many homes would really have access to their local stations on the new satellite system - the companies said 75 percent of the country would have such service - it was clear the new company was likely to push ahead changes in the market.

``This certainly addresses in a meaningful way the issue of the local signals,'' said Rick Westerman, an analyst with UBS Securities. ``This is important for DBS. It's ultimately the consumer who wins.''

Murdoch said monthly subscription rates for the service would be comparable to cable.

``We don't see a price war with cable,'' Murdoch said. ``It's a matter of the quality'' of the picture and the sound.

He added that he expected the rate of growth of the new company to be extremely rapid, once News Corp. launches a new satellite later this year and the new company begins to offer local television stations along with the 500 other offerings.