(Reuters) -U.S. satellite TV provider DirecTV said on Thursday it has terminated its agreement to acquire Echostar's satellite television business that includes rival Dish TV over a failed debt-exchange offer.

For the deal to go through, Dish DBS debtholders had to agree to exchange their debt for new debt in the merged entity at a discounted rate, taking a "haircut" of about $1.57 billion on the debt.

Reuters reported last week that a group representing about 85% of Dish bondholders had rejected that proposal.

"... we have terminated the transaction because the proposed exchange terms were necessary to protect DirecTV's balance sheet and our operational flexibility," said Bill Morrow, CEO of DirecTV.

The proposed deal, initially announced in September, was seen as a strategic consolidation in a shrinking pay-TV market.

As part of the two-step transaction, DirecTV was to pay $1 to buy the pay TV business called Dish DBS that includes Dish and Sling TV, while agreeing to assume about $9.75 billion of Dish's debt. Dish and DirecTV launched an exchange offer at a discounted rate for the debt to help extend the maturities.

DirecTV had said earlier this month it will abandon its acquisition by Nov. 22, if Dish TV bondholders don't agree to a debt exchange.

DirecTV said the deal termination will be effective Friday.

Axios first reported on the deal termination.

(Reporting by Gnaneshwar Rajan in Bengaluru; Editing by Sonia Cheema and Rashmi Aich)