BANGALORE (Reuters) - EchoStar Corp (SATS.O) agreed to buy Hughes Communications Inc HUGH.O for $1.33 billion, giving the digital set-top box maker the needed bandwidth to better serve its key customer Dish Network (DISH.O).
Hughes is one of the world’s largest providers of broadband satellite services and the deal could help EchoStar, co-founded by Dish Network’s CEO and billionaire Charlie Ergen, provide an array of services such as mobile television and Internet Protocol TV.
Dish accounts for more than 80 percent of EchoStar’s revenue, which includes sales of set-top boxes and related services.
The deal will give EchoStar access to Hughes’ Spaceway 3 Ka-band satellite, which offers the highest traffic-carrying capacity among all commercial satellites. Dish’s rival DirecTV Group DTV.O has already moved to the Ka band spectrum.
“Strategically, it makes sense because Hughes has got a growth business in selling satellite broadband to consumers and that can fit with satellite TV,” Tim Farrar, a satellite industry consultant at Telecom, Media and Finance Associates told Reuters.
“Echostar is a vehicle for finding the next big thing. It may or may not be satellite TV. The idea would be to find one or a combination of the next big things,” Farrar said.
Some analysts also said the deal could help Hughes become the key consumer broadband service provider for Dish Network, replacing a competitor.
“Dish could choose to sever its relationship with ViaSat (VSAT.O) and instead distribute services from Hughes,” said Raymond James analyst Chris Quilty. ViaSat shares dropped 5.4 percent to trade at $42.45 in afternoon trading on Nasdaq.
Hughes Communications, which traces its roots to pioneer aviator and billionaire Howard Hughes’ Hughes Aircraft Co, provides network services for a number of large companies — including Wal-Mart (WMT.N), General Motors (GM.N) and Best Buy (BBY.N) — as well as government agencies and households.
Hughes’ systems support high-speed Internet access, video conferencing and VoIP (voice over Internet protocol) telephone calls.
EchoStar’s offer for Hughes marks the second billion-dollar deal for Charlie Ergen this month. On Feb 1, Dish Network offered to buy DBSD North America, a satellite network operating under bankruptcy, for $1 billion.
Under the terms, Hughes shareholders will get $60.70 per share, a 31 percent premium to the stock’s January 19 close, a day before Reuters reported that Hughes had hired bankers for a sale.
Including assumption of debt, the deal is worth $2 billion.
Investors, however, bid shares of Hughes below the offer price, dismissing the possibility of rival bids in a sector that has been through a wave of consolidation.
Hughes’ shares fell nearly 4 percent to $59.47 in late morning trade on Nasdaq. The stock has risen 20 percent since January 20, when the company had put itself on the block.
“The fact that the stock has moved lower suggests to me that this is at this point an arbitrage type opportunity and that it is not likely that higher bids will surface,” said CL King analyst Lawrence Harris.
Hughes had hired Barclays Capital (BARC.L) to advise on its sale, people familiar with the matter told Reuters on Jan 20.
The sale of Hughes would allow private equity firm Apollo APOLO.UL, which has been a major shareholder in the company since late 2004, with a 57 percent stake, to exit its investment.
EchoStar’s acquisition of Hughes is expected to close later this year, the companies said in a statement.
Additional reporting by Sayantani Ghosh; Editing by Saumyadeb Chakrabarty