Lockheed gets OK to purchase Comsat; Satellite firm's shares soar 27% on approval by Justice Dept.; 'Pro-competitive merger'; Price is $2.5 billion for 49% of stock; deal deadline is Saturday


Comsat Corp. shares climbed 27 percent yesterday after the Department of Justice said it would not oppose Lockheed Martin Corp.'s plans to acquire the satellite service company for $2.5 billion.

The move clears the way for Lockheed to buy 49 percent of Comsat's shares by a deadline tomorrow, completing the first phase in a two-phase transaction. Lockheed's purchase of the rest of the company will require require congressional action, because law prevents one company from owning more than 50 percent of government-created Comsat.

"All the regulatory conditions have now been satisfied to conclude the tender offer," said Betty C. Alewine, Comsat's chief executive officer. "The Comsat-Lockheed Martin merger is a strong, pro-competitive merger that will increase competition in the global telecommunications market by giving consumers an additional choice."

Bethesda-based Lockheed said it did not "anticipate encountering any obstacles in its due diligence review and expects to close on the first phase of the two-phase transaction on Saturday." But the company left itself room to back out, saying its review includes scrutiny of two Federal Communications Commission orders issued Wednesday that could reduce Comsat's value.

If Lockheed's tender offer for 49 percent of the company is not complete by Saturday, either company may terminate the deal.

Shares of Comsat, also based in Bethesda, rose $7.50, to close at $35. Lockheed Martin's shares fell $1.3125, to close at $33.6825. "I would say that it looks very good for the Comsat shareholders," said Tom Burnett of Merger Insight in New York.

Lockheed, which wants to strengthen its newly created global telecommunications unit, is proposing to purchase 49 percent of Comsat's common stock at $45.50 a share, or $1.3 billion, and assume $455 million in debt. It would later issue one share of its stock for each remaining share of Comsat.

The Justice Department approval came one day after the FCC signed off on the deal. "They've certainly jumped a couple of hurdles this week with both the FCC and DOJ approvals," said Paul Nisbet, an analyst with JSA Research Inc. in Newport, R.I.

But on the same day the FCC approved Lockheed's 49 percent acquisition of Comsat, the federal agency voted to end Comsat's exclusive right to provide U.S. access to Intelstat, a global, intergovernmental satellite organization.

The FCC also ruled that Comsat can impose only a 5.58 percent surcharge on customers to cover expenses of international and regulatory work -- far less than the 16 percent expected by some.

Comsat receives payments from companies such as AT&T; Corp. and broadcast television companies to transmit international telephone calls and video services over the Intelsat system.

Comsat said the surcharge "is not expected to have a material adverse effect on Comsat's financial performance" in coming months. Lockheed said it "cannot yet assess the potential impact of direct access, financial or otherwise, on Comsat."

"I'm sure Lockheed is disappointed," said Nisbet, the JSA analyst. The surcharge will be "about 10 percent less than they expected."

Some analysts questioned whether the FCC's moves would prompt Lockheed to exercise its right to back out of the agreement in the event of adverse changes in circumstances. "We don't have the final determination by Lockheed that they can live with all these conditions," said Burnett of Merger Insight.

Other analysts said the effect of the FCC actions will be limited because the surcharge applies only until Intelsat privatizes in 2001. Observers also questioned whether the FCC ruling meets the legal standard that would let Lockheed end the tender offer.

"There's nothing in the decision by the FCC yesterday that should by itself derail the Lockheed-Comsat transaction," said Scott Blake Harris, former head of the FCC's international division and now managing partner at Harris, Wiltshire & Grannis law firm.

"Everything the FCC did could reasonably be anticipated when the deal was announced."

With its approval, the Justice Department apparently found that Lockheed's failure to fulfill an agreement to sell its 14 percent stake in Loral Space and Communication Ltd., a Comsat competitor, wasn't enough to warrant blocking the Lockheed-Comsat deal.

The merger announcement, made last Sept. 20, is nearing its one-year anniversary.

"Frankly, the reason the regulatory approvals have taken so long is a number of our competitors have pulled out all the stops to slow it down," said Jay Ziegler, a Comsat spokesman.

Still, the two companies may face a long road to get necessary legislation to complete the second phase of the deal. The Senate approved a bill to relax Comsat ownership in July.

But the same effort may have trouble in the House, where Commerce Committee Chairman Thomas J. Bliley Jr., a Virginia Republican, wants satellite reform legislation passed before the conclusion of a Lockheed-Comsat merger.

"What still remains is congressional legislation," said Nisbet, the JSA analyst. "I don't know that we'll even see it this year."

Bloomberg News contributed to this article.

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