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Vivendi Universal and EchoStar Communications Corp. surprised everyone but themselves Dec. 14 by announcing an eight-year strategic alliance capped by Vivendi’s obtaining a 10 percent stake in the direct-broadcast satellite operator for a cash payment of $1.5 billion. The deal’s announcement interrupted last week’s long-running commercial for USA Networks chairman Barry Diller, who is in negotiations not only to sell USA’s entertainment assets to Paris-based Vivendi but also to assume personal leadership of Vivendi’s Universal Studios. Jean-Marie Messier, Vivendi’s chairman and CEO, said in a conference call Friday that a Diller-USA deal was never “the first distribution move we had in mind in the United States.” That a deal with Littleton, Colo.-based EchoStar had always been foremost with Messier caught Wall Street flat-footed. But the surprise and the terms of the transaction that generated it appeared to work in the French executive’s favor. “We note that this is an outstanding deal for Vivendi Universal and that some of this benefit comes at the expense of EchoStar and potentially Hughes shareholders,” John Stone, an analyst at Ladenburg Thalmann & Co., reported in a note just after the deal’s announcement. Hence the question Stone worked into his report’s headline: “Did EchoStar leave money on the table?” The question virtually floored those who know Charlie Ergen, EchoStar’s penny-pinching chairman and CEO. But Ergen is mostly concerned these days about keeping regulators from torpedoing his recently announced $26 billion takeover of DBS leader Hughes Electronics Corp. It was with surprising aplomb, nonetheless, that Ergen admitted to “Vivendi’s getting a great bargain” in Friday’s conference call. “But the marketplace is the marketplace,” he explained. The reference was to the equity market, where EchoStar stock closed virtually unchanged Friday at $25.98 per share. Within the past year, however, it has traded just shy of $40. Vivendi’s American Depositary Receipts also showed little movement Friday, rising but 0.9 percent to close at $48.95. That Ergen was willing to sell Vivendi its stake for the equivalent of $26.04 per EchoStar share, as well as invite Messier on to EchoStar’s board, has a lot to do with the stock’s sagging price. But it also reflects burdens shouldered by Ergen for the chance to combine his EchoStar with Hughes’ DirecTV operations. Vivendi’s cash infusion “provides EchoStar with much needed cash to apply against the company’s outstanding $5.5 billion bridge loan for merging with General Motors’ Hughes Electronics unit,” Stone wrote in his note. “Combined with the proceeds from a $700 million bond financing [also announced Friday] and their existing $2 billion war chest, the company has stated that they now have all the cash they need to fund their cash obligations in the event their merger with Hughes is not approved.” In addition to a $600 million breakup fee, those obligations include a still-binding agreement for EchoStar to ply Hughes and its GM parent with cash by buying Hughes’ PanAmSat unit for $2.7 billion plus debt. This deal with Vivendi, Ergen said, “puts us on sound financial footing to meet” all such obligations. For Vivendi, whose 10 percent EchoStar stake would be diluted to less than 5 percent should Hughes be allowed to join the enterprise, the partnership addresses concerns about technology as well as distribution. In addition to distributing five new Vivendi Universal channels, EchoStar agreed to deploy MediaHighway — described as interactive middleware technology developed by Vivendi’s Canal+ unit — to allow EchoStar’s “DISH Network customers using personal video recorders unique interactive TV services, such as movies from Vivendi Universal and music from Universal Music Group.” Messier expanded on basic deal terms, saying it could eventually lead to the distribution of up to 15 Vivendi channels, “including interactive services, over the entire EchoStar footprint, which covers 100 percent of U.S. households.” He also noted that, should the Hughes deal go through, EchoStar’s U.S. subscriber total would jump from the 6.9 million projected for year-end to more than 15 million. “As far an equity investment in a distribution company, this is going to be the one,” Messier said of the deal slated to close in the first quarter of 2002. And while there may be other distribution pacts, he added, they’ll be “straight commercial deals negotiated at arm’s length with no equity investment.” An EchoStar spokeswoman said her company handled negotiations itself. And though Vivendi’s chief is a former Lazard banker, the company turned to Lehman Brothers Inc. for financial advice and to Cravath Swaine & Moore for legal counsel. Those parties introduced “contingent value rights” into the deal, Messier said, giving Vivendi downside protection of 15 percent if the Hughes deal does go through and 35 percent if it does not. The deal also includes revenue-sharing terms for the downloading of movies and of music, which was hailed as having great promise as a future growth driver. Although precise sharing terms weren’t disclosed, Messier averred it scarcely mattered. “We believe this is a very good investment on a stand-alone basis,” he said. As for Diller, Messier had little to say other than to confirm that he was meeting with directors later Friday to provide “an overview of the status of negotiations” and to caution that a Diller deal would be at least one more board meeting away. “When, in due time, if a decision is here, the board will reconvene.” Alan Tillier in Paris contributed to this report. Copyright (c)2001 TDD, LLC. All rights reserved.

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