EchoStar Corp is to acquire satellite broadband specialist Hughes Communications, including its subsidiary Hughes Network Systems (HNS), for approximately US$2bn in an all cash transaction.
Under the terms of the takeover, EchoStar will pay Hughes…
EchoStar Corp is to acquire satellite broadband specialist Hughes Communications, including its subsidiary Hughes Network Systems (HNS), for approximately US$2bn in an all cash transaction.
Under the terms of the takeover, EchoStar will pay Hughes stockholders US$60.70 per share, representing a premium of 31% over Hughes’ unaffected closing share price of US$46.43 on 19 January 2011, the date when reports first emerged that Hughes was subject to potential takeover bids. The price represents an enterprise value to EBITDA multiple of approximately 9x trailing EBITDA and 7.5x the forward EBITDA consensus estimate.
Hughes’ majority shareholder, the private equity group Apollo Management with a 57% stake, has already approved the deal as have the boards of directors of both companies. Apollo is set to net just over US$750m for its stake, a substantial return on the US$55.6m it invested for a 50% stake from DirecTV back in 2004, although it has since made incremental investments in Hughes.
The US$2bn valuation also includes Hughes’ US$713m net debt, which EchoStar plans to repay. The only Hughes debt that will remain is the US$115m Coface-backed loan facility from BNP Paribas and Societe Generale that is being used to help fund the launch of Hughes’ next-generation Ka-band broadband satellite Jupiter, which is scheduled to be launched by Arianespace in the first half of 2012.
To fund the acquisition, EchoStar has secured a US$1.8bn bridge financing from Deutsche Bank. The debt comprises a US$1bn senior secured bridge loan and a US$800m senior unsecured bridge financing.
While the commitment of these funds is contingent on the closing of the transaction, the merger agreement is not reliant upon EchoStar have procured such financing.
The transaction is expected to close later this year subject to the customary closing conditions including regulatory approval. If the merger is terminated by the target in the interim, Hughes may be required to pay EchoStar a termination fee of US$45m.
Deutsche Bank served as financial adviser for EchoStar with Sullivan & Cromwell legal advisers. Barclays Capital advised Hughes with Akin Gump Strauss Hauer & Feld its legal counsel.
EchoStar’s grand broadband plan
EchoStar’s stated reasoning behind the transaction was that it would greatly enhance its capabilities for broadband delivery of video and data. The company’s president and CEO Michael Dugan argued that the merger would “create a powerful leader in video and data transport.”
The assertion reflects the view of EchoStar’s founder Charlie Ergen that broadband is fast becoming key to video distribution. In his last quarterly conference call, Ergen spoke of the shift in the consumption of video from linear to on-demand, arguing the need to “strategically adapt our company to where we think the demand goes.”
This focus on bolstering EchoStar’s broadband offering may also shed some light on the company’s other takeover target – Terrestar Networks. Along with sister company DISH Network’s US$1bn bid for DBSD North America, EchoStar’s offer could potentially give Ergen access to a substantial amount of North American S-band spectrum, which could be used to offer next generation wireless broadband services, including delivering video.
However, for this to be a reality, Ergen would have to be willing to invest a significant amount in the capital costs related to rolling out a nationwide terrestrial network as LightSquared and its hedge fund owner Harbinger have done. Some analysts doubt the likelihood of such a strategy and point to Ergen using the spectrum more as a negotiating tool with either LightSquared, which is also eyeing Terrestar, or AT&T, which has frequently been the subject of media speculation that it might make a bid for DISH Network.
