With virtually no new programming on its slate going into the fall season, people are wondering whether it's about time to write off Pax TV.
After spending most of 2001 and 2002 hemorrhaging more than $110 million, Paxson Communications Corp. finally realized last fall that it couldn't continue to aggressively build its TV network. Paxson shut down its West Coast offices, returned to afternoons of infomercials, sold its Touched by an Angel
contract to the Hallmark Channel, and backed off on original programming.
Averaging less than a 1 Nielsen rating in prime time, Pax TV does not exactly inspire water-cooler conversation. Even NBC, which owns a third of the network, seems to have lost interest in it.
Changes at the new, trimmed Pax TV came quickly, catching even much of Paxson's staff by surprise. In fact, last year at this time, Pax TV was promoting three new shows—Body and Soul, Just Cause and Sue Thomas: F.B.Eye—and one midseason series, Young Blades. People took the shows for granted, crowded out as they were by the broadcast networks' season premieres. But compared with this year, when the channel has no new shows coming this fall, last year seems like a programming bonanza.
"To a certain degree, we are handling Pax TV more like a cable network than a broadcast network," says Dean Goodman, president of Pax TV and president and chief operating officer of Paxson Communications Corp. "We're going to be non-symmetrical as far as our show introductions are concerned. For us to introduce our shows in direct competition with the fall broadcast season isn't the most effective way for us."
Focus on Sunday
According to Goodman, Pax TV plans to build the network one night at a time, focusing this fall on Sunday, where Miracle Pets
starts at 6 p.m. ET and It's a Miracle
closes out the night at 10 p.m. Sue Thomas
remains on the schedule on Sundays at 9 p.m., following Doc, starring country star Billy Ray Cyrus, at 8 p.m. Saturday nights also are original, Goodman says, with low-cost made-for-TV movies.
Still, though focused on building, Pax TV executives aren't talking specifically about any new series. Pax TV has one program in development for 2004, Goodman says, from the creators of Doc
and Sue Thomas, the network's two most popular shows.
Popular? Those two score a 1.2 and a 1.1 in households, respectively, with Doc
up 20% over the time period compared with last year and Sue Thomas
up 38%. But those percentage gains represent jumps of 1.0 to 1.2 and 0.8 to 1.1, ratings not even considered high in daytime syndication. Cable networks routinely rate in that arena, which may be why Paxson is starting to consider itself more a cable network than the seventh broadcast network it was envisioned. Already, some 28 million households receive Pax TV via cable and satellite in markets where Paxson owns no TV station. Often Paxson pays for that carriage.
Paxson founder Lowell "Bud" Paxson has endured his share of disappointments since he started the network on Aug. 31, 1998. He intended to create a network to increase the value of his low-power TV stations, acquired at a bargain and boosted by the Supreme Court's 1997 decision to retain rules requiring cable operators to carry every TV station in a market. Paxson thought he had finally found a buyer in 1999 when NBC bought 32% of the company for $415 million at 8% interest.
But that deal went south when the two companies couldn't agree on how to share programming, and NBC went looking elsewhere for partners. NBC bought Telemundo in 2001 for nearly $2 billion, making it unlikely that NBC would ever purchase Paxson outright because owning the new Telemundo stations created too many complications under FCC rules. Even with the June 2 rule changes, Paxson still is an unlikely fit for NBC, say sources close to NBC.
$115M in reserves
Last December, NBC acquired Bravo for $1.25 billion, and its eye has recently gone wandering even further afield, most recently scanning Vivendi Universal.
While NBC does have the right to veto a potential Paxson acquisition, it would welcome a good deal.
"We've told Paxson we are not standing in his way," said NBC Chairman Bob Wright in an interview with BROADCASTING & CABLE last November. "If he wants to bring us a credible buyer or an investor who really wants to take us out and has a good idea and doesn't want to do it with us, I'll listen to him."
Meanwhile, Paxson Communications can sell its stations off piece by piece, with NBC having veto rights in the top 20 markets and right of first refusal in the top 50 markets. To increase the company's liquidity, Paxson has done just that, selling five stations over the past year to put nearly $90 million in the bank. With cash reserves at around $115 million, the rest has come from programming savings and staff cuts.
After making those cuts, Paxson dramatically improved its free cash flow, increasing it to $2.4 million in first quarter 2003, up from negative $32.7 million in first quarter 2002. And Paxson's earnings before interest, taxes, depreciation and amortization also improved year-to-year by 137.4%, up to $17.9 million in first quarter 2003, higher than all of 2002's EBITDA combined. All the cash-flow improvement came as a result of programming changes and cuts, not due to station sales, says Seth Grossman, Paxson executive vice president and chief strategic officer.
Sitting on $1 billion?
"Our game plan has always been to improve the overall health of our operations," he says. "Once we turn around operations then, we can invest more money in original programming, and we're well on our way to getting there."
Says Andrew Van Houten, managing director and senior media analyst at Deutsche Bank, "If Paxson was actually owned by a huge company, the next step would have been to continue to invest in programming. But Paxson isn't owned by a deep-pocketed parent. It's owned by an entrepreneur, and it's not like he can look to some deep-pocketed parent to spend hundreds of millions of dollars to get Paxson to the next level." Van Houten has a strong buy recommendation on Paxson's preferred stock and bonds, considering both to be undervalued.
Paxson can also take heart in that BIA Consulting in April valued the company's 60 TV stations at between $2.9 billion and $3.1 billion. That total doesn't include the value of Pax TV's cable and satellite-TV distribution or of the Pax TV network. BIA's valuation calmed financial analysts worried about Paxson's heavy debt load, which nears $1.9 billion, including $1 billion in outstanding preferred stock, $530 million of which is owned by NBC. If the valuation holds true—and so far Paxson's stations have sold for more than their appraised worth—Paxson is sitting on about $1 billion in equity.
The question now is whether Paxson can tap that equity. So far, no buyer has publicly come calling, and NBC is clearly out of the picture. In June, the FCC ruled that TV-station groups could own duopolies in any market as long as two of the top four stations don't combine, and Paxson expected to look even more appealing to buyers. To that end, Paxson has hired investment bank Bear Stearns to help it find its perfect match.
Until that happens, if it happens, "our mission for the network and for the stations is that they both continue to grow," Goodman says. "It's business as usual."
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