A demand for a divorce and a half-billion-dollar property settlement would be bad news for most executives. But not for Paxson Communications Chairman Lowell "Bud" Paxson, who sees NBC's move to unwind its investment as helping him find a new buyer or partner for his ailing company.
NBC last Thursday demanded that Paxson redeem $549.2 million in preferred stock. The shares—convertible into Paxson common stock—represent NBC's 32% stake in the company and its languishing Pax TV network. After the news broke, Paxson shares popped up 20% to $6.
Paxson doesn't have a prayer of paying off NBC from internal funds. His company has $1 billion in other debts and is starved for cash. The company posted some profits during the third quarter, but only through, as Paxson executives euphemized, "programming modifications." Translation: scrapping its afternoon schedule in favor of infomercials, loading prime time with reruns of shows like America's Funniest Home Videos, and balking over any new series. The company said in an SEC filing last week it has sliced payments for programming rights by 80% over the year.
But having NBC clearly state its intentions helps clear the way for Paxson to find a new relationship, perhaps one that won't sour as badly.
"The only way anybody gets worked out of this is a purchase of the company," said one Wall Street executive familiar with the situation.
Bud Paxson has been waving a for-sale sign for months, touting how new, relaxed station-ownership rules made his portfolio much more valuable. He contended in a statement that NBC is now easing the process by providing clarity.
The statement also claimed, "NBC's request does not create any demand upon the company's liquidity position" because it doesn't have to do anything for a year and is not actually obligated to cough up cash it doesn't have. Further, covenants with lenders block payments to NBC while Paxson Communications' leverage remains so high."
NBC responded that the redemption is, indeed, a demand. "We expect to be paid," said Brandon Burgess, executive vice president of business development,
"The asset is undermanaged, and we don't like the business plan and where it's gone or, more precisely, where it hasn't gone," said Burgess.
Paxson, co-founder of Home Shopping Network, spent the 1990s amassing a portfolio of mostly weak-signaled UHF stations and loading them with infomercials and TV preachers. "Some of the stations can't send a signal across the parking lot," said one media analyst.
Paxson secured a $400 million investment from NBC in 1999, selling the company on the idea of a seventh broadcast net, with lots of family-friendly original programming in prime and old off-net reruns and game shows during other hours.
Broader attempts to co-develop programming never gelled, and Pax TV's ratings and ad sales were too weak to support anything very ambitious. The recession helped seal the company's fate.
Paxson solved the problem of weak signals by demanding must-carry status on cable systems that retransmit his programming. But unlike a cable network, Pax TV doesn't charge license fees, subsisting only on ad sales.
"Paxson would be a pretty good cable channel," Burgess said. "But you can't operate that way when you have an infrastructure of 60 stations to support." The company has an accumulated deficit of $1.5 billion.
"An organization has to buy in, and that organization didn't buy in," one industry executive close to Paxson said of NBC.
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