DJ Pegasus Ch 11 Seen As Last Try To Keep DirectTV Distrib


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Sep 8, 2003
DJ Pegasus Ch 11 Seen As Last Try To Keep DirectTV Distrib

NEW YORK (Dow Jones)--Equity investors and bondholders of Pegasus Communications Corp. (PGTV) found the company's filing for Chapter 11 bankruptcy protection, on behalf of several subsidiaries, oddly comforting Thursday.

The filing is seen as the company's last-ditch attempt to hold on to its exclusive distribution rights for DirecTV Group Inc. (DTV). The bankruptcy is also seen as a way to stave off judgement on a $62.5 million damage award that it owes DirecTV.

Analysts said it was known for some time that Pegasus, of Bala Cynwyd, Pa., would file for bankruptcy, since it was already struggling financially.

Pegasus, which distributes DirecTV in rural areas through the National Rural Telecommunications Cooperative, has been embroiled in legal wrangling with DirecTV for years as the three parties carried on a dispute about the length and terms of their contracts.

After ruling that Pegasus would pay DirecTV a $62.5 million damage award for a separate issue, a federal judge in mid-May threw out all claims between Pegasus and DirecTV, putting an end to the disagreement.

In addition to the $62.5 million damage award it owes, Pegasus also has an $81 million bond maturity in 2005. Either of the events could have forced a Chapter 11 filing, analysts said.

"This gives them some latitude to deal with their problems," said Shelly Lombard, senior credit analyst at GimmeCredit, an independent fixed-income research firm.

DirecTV and the National Rural Telecommunications Cooperative announced Wednesday they had decided to terminate their exclusive distribution agreement in favor of giving members and affiliates a chance to sign new pacts directly with DirecTV. NRTC members now have the option of selling their subscribers for $875 or $1,050 each, or to remain as exclusive distributors until June 30, 2011.

Notably, Pegasus, the NRTC's largest affiliate, was excluded from the agreement and only given the option of selling its subscribers to DirecTV for $675 each, or $750 million in all.

Pegasus called the new agreement "unlawful" and accused DirecTV of "strong arm tactics."

"It is with the greatest reluctance that we have concluded that Pegasus Satellite TV must seek the protection of Chapter 11...while we seek affirmation of our rights," said Mark Pagon, chief executive of Pegasus, in a prepared statement Thursday.

By filing for bankruptcy, Pegasus can conserve its cash and stop DirecTV in its tracks, because contract issues will be sorted out in court.

"Bankruptcy gives them a lot of tools, it gives them lots of leverage," said Bill Rochelle, partner at Fulbright & Jaworki. Immediate threats are taken away, so it does even the playing field, he added.

Pegasus is seeking to use the automatic stay, given to any company while in bankruptcy proceedings, to keep the exclusive agreement alive. Companies in bankruptcy are shielded, to some extent, from most creditors' demands and lawsuits.

Pegasus will argue that it is a wrongful termination of the contract and will seek to use bankruptcy laws to state that the new NRTC-DirecTV agreement can only be rejected by the debtor, said Bill O'Connor, a partner at Buchanan Ingersoll. "It's a novel argument, and I wish them a lot of luck, but I think they have steep mountain to climb," he added.

Pegasus was also facing the immediate threat of a judgement early next week regarding payment of the $62.5 million damage award to DirecTV. The company was required to respond either by posting a bond guaranteeing payment, paying a portion of the award, or other action. A Pegasus spokesman said the company was still in the process of reviewing its options and deciding how to respond to the deadline when it filed for bankruptcy.

Experts also said the bankruptcy could be a way to seek competing bids for its subscribers.

GimmeCredit's Lombard and other analysts suggested Echostar Communications Corp. (DISH) Chief Executive Charlie Ergen as a possible bidder. They noted that Ergen has been wont to intervene at the last moment with acquisitive bids for competitors such as Loral Space and Communications Ltd. (LRLSQ) and DirecTV.

But while bankruptcy offers Pegasus some more leverage, it is also seen as risky, as liquidation is always a possibility, said O'Connor.

"It would seem the NRTC has the right to terminate its agreement with DirecTV," said Tom Eagan, analyst at Oppenheimer & Co. It appears that Pegasus is optimistic as to how to interpret its rights to the agreement, he added.

DirecTV spokesman Bob Marsocci described Pegasus' claims that the contract termination is unlawful as "patently false."

"Pegasus is not a party to the agreement, has no rights under the contract and DirecTV can modify the contract at any time," he said.

After being halted from trading all of Wednesday, Pegasus shares fell more than 20% early Thursday and recently traded down $1.20, or 7.8%, at $14.23.

Pegasus bonds traded slightly higher early Thursday, but recently declined to 55 cents bid, 56 1/2 offered, unchanged from the close Wednesday, said traders.

Market participants said the Chapter 11 filing may be good news for bondholders.

Exactly how valuable the company's 1.1 million rural customers are was a looming question, and Wednesday's activity gave bondholders a starting point to work with, which many take as a hopeful sign.

DirecTV's $675-per-subscriber acquisition price covers Pegasus' bank debt, but falls short of covering its approximately $900 million of bond debt and about $300 million of preferred stock, said Lombard of GimmeCredit. The current offer provides bondholders a recovery rate of approximately 40 cents to 45 cents per dollar, she said.

The offer itself provides a floor delineating a worst-possible scenario for bondholders, though there are some potential snafus afoot. DirecTV has offered to pay only for the subscribers Pegasus has when the deal closes, which means the deal's value could diminish if Pegasus continues what has been a slow trickle of subscriber losses, or if competitors jump in and attempt to woo subscribers away prior to a resolution.

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