by Marc Crossman and Anh Steininger

Hughes continues to transform into a pure-play satellite services company.

Hughes kicks off the year with three strategic moves that are sure to unleash even more value in its stock. First, in its continuing effort to focus more on the high growth and high margin satellite service businesses, Hughes announced in mid-January the sale of the satellite manufacturing division to Boeing. The sale is very positive for Hughes as it accomplishes four things. First, Hughes is on its way to becoming a pure-play satellite service player, allowing the company to trade at a higher multiple than it currently does, as evidenced by Echostar’s valuation.

Second, it provides Hughes with the cash that the company needs in order to fund its high growth service businesses: DirecTV, DirecPC and future service-based businesses such as Spaceway. If this transaction did not take place, then Hughes would have had to raise the necessary funds in the public markets. Third, by Hughes circumventing the public debt and/or equity market, GM can begin divesting its interest in Hughes sooner rather than later. We continue to believe that any divestiture by GM is positive. Fourth, the performance of the satellite manufacturing business has been a disappointment this past year, and furthermore, this sector will experience flat growth, at best, for the next two to three years.

For its second strategic move, Hughes repositioned itself as a multimedia and broadband company through Hughes Network Services (HNS). Hughes will be re-focusing attention on HNS by repositioning the story with investors as a broadband play. Today, the majority of the businesses in aggregate is product-related, but over the course of the next few years the mix will shift and will be split evenly between broadband products and services.

Essentially, HNS will build a strong broadband subscriber base for Spaceway, Hughes’ planned Ka-band satellite project providing high bandwidth to business and residential customers. HNS has reorganized itself to focus strictly on manufacturing broadband products and providing broadband services–in other words, providing total broadband access. HNS will focus its broadband initiatives on the following markets: the carrier market, the enterprise market and the consumer market. In 2000, Hughes predicts that the consumer and enterprise markets will make up 40 percent each of HNS’s revenues, with the remaining 20 percent made up of revenues from the carrier services. By developing the broadband potential in these markets, Hughes will create a strong subscriber base for Spaceway.

The third big event for Hughes is not so much a move by Hughes, but a move by its parent, GM. The decision by GM to reduce its holdings (by roughly 139 million shares out of 296 million) through the funding of pension liabilities and an exchange offer, although very positive for Hughes in the longer term, could create near-term selling pressure on GMH. As a result of this transaction, which is expected to close before June 30, 2000, the arbitrage community will likely short GMH’s stock and go long on GM’s stock in order to take advantage of the price arbitrage created by the exchange offer. However, the long-term effect on Hughes would be very positive. Regardless of near-term pressure from trading conditions, we remain bullish on the stock and the fundamental outlook for Hughes.

The long-term effect on Hughes would be very positive for two reasons. First, any reduction by GM of its stake in Hughes would put Hughes one step closer to trading as common stock instead of as a tracking stock. Trading as a common stock would eliminate the discount normally associated with tracking stocks, and it would make it much easier for Hughes to make acquisitions, or potentially be acquired by a larger media or broadband company. Second, in completing this restructuring, GM would inject roughly 75 million GMH shares into the float. This would substantially increase the liquidity of GMH stock in the market (by approximately 50 percent).

As a result of the above actions, combined with the Primestar conversion progressing ahead of plan and local-into-local service promising to be a huge success, we continue to be very positive about Hughes’ prospects.

Marc Crossman and Anh Steininger are satellite analysts at J.P. Morgan in New York City. These views are those of the authors and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.