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Partnership Gone Sour

The one Pax TV show with any buzz these days is Cold Turkey. Chain smokers are tricked into agreeing to live in a house together and quit smoking. Edgy and confined, the smokers begin to turn on each other.

This sounds a lot like Pax TV itself these days. CEO Bud Paxson, major backer NBC and public investors are all trapped in a house trying to cope with Paxson Communications' massive debt habit.

When NBC bought a third of the station group in 1999, NBC Chairman Bob Wright and Bud Paxson were happy partners. Today, synergy is elusive, the two companies are locked in a court fight, and Paxson's stock is approaching zero largely because of low ratings and a weak ad market.

“Paxson is an awkward situation for us,” Wright acknowledged at a recent investor conference, adding, “Our goal is not to turn this into a bankruptcy.”

Wall Street's vultures—investors in distressed bonds—are hovering, calculating that, even if Paxson goes into Chapter 11, the broadcaster's stations are worth enough to pay off all bank loans and most of its bonds. Whether NBC and other shareholders could be paid off is less certain.

Bud Paxson exudes as much confidence as ever. Between his cash on hand, station sales and refinancings, he has been able to manage the debt. Reviving the company “is just a matter of believing you'll find one hit show,” he says.

He points to the revival in progress at ABC. “Look at what they've done with ABC. They were in the dumper a year ago, totally. Now they're coming out like they own the world.”

Paxson is now trying to avert a showdown that is part of a lawsuit over the terms of NBC's investment. An NBC victory could pretty much wipe out the value of Paxson Communications' already low common stock.

It's likely that Paxson will delay the confrontation, but even so, the company is not even close to resolving how to cope with $2 billion in total debt.

After six years as a network and 13 years as a station group, Pax is in the ratings basement. Viewership is just one-tenth of NBC's and even ranks below 15 basic-cable networks. More than 60% of its sales come from infomercials that run in daytime and late at night.

Both Paxson and NBC execs are guilty of expecting more out of the partnership than they actually got in writing. Paxson assumed that NBC's investment would ultimately lead to a takeover. NBC executives assumed they would have a bigger say in programming on Pax TV.

NBC overlooked a big point: Bud Paxson's programming tastes are not those of mainstream Hollywood. How does he like ABC megahit Desperate Housewives? “I don't think much of it,” he says. In any case, the show would violate Pax TV's family-friendliness. (Desperate Housewives, by the way, drew 22 million viewers last Sunday—a bit more than Cold Turkey.)

Paxson initially envisioned his network as another upstart network, like Fox and The WB. He assembled a portfolio of UHF stations and programmed them with infomercials and home shopping. Between rebuilding towers and cutting carriage deals with cable operators, the stations reach 63% of U.S. homes.

In 1998, he sought to take on larger broadcast networks by counterprogramming with family-friendly fare, often with a religious tint. He had borrowed heavily to buy stations and wanted to attract a buyer.

Paxson thought that buyer would be NBC. In 1999, the giant network bought $415 million worth of preferred stock, or a 32% stake in Paxson Communications. Paxson would get better programming and sales expertise. NBC could control two stations in key markets at a time when it appeared that duopolies would become legal.

Both sides expected that, if the FCC loosened the cap on TV-station ownership, a takeover would follow. “I thought they would wind up wanting to take the asset into the fold when the time was right,” says Paxson.

The feds did indeed loosen the rules, and NBC was permitted for the first time to own duopolies. But NBC seized upon that to buy not Pax but Spanish-language network Telemundo.

Why the sudden change of heart? The Hispanic market is hot; Pax's older viewers are not.

NBC insists in a lawsuit that, by Nov. 13, Paxson must reset the payment rate of the original deal because he declined to buy NBC out of the deal. NBC says the terms of that deal entitle it to collect much higher dividends—about 30% versus about 8%. Paxson has countersued NBC, asking a Delaware court to declare that the “reset” value should be done at much, much more favorable terms.

Paxson is in the same place he was five years ago: looking for a buyer. If he files for Chapter 11 bankruptcy protection, it would spell the end of a colorful entrepreneur's dream, and NBC could be left paying the very expensive bill.

Meanwhile, Paxson praised NBC's move to protect its investment by help him develop better programming.

An optimist, he has faith. Cold Turkey is one of 10 new series coming this year, including one based on the post-Apocalyptic book series Left Behind, about a world in which Jesus reappears and takes all his flock, leaving sinners behind.

But even if those shows are hits, they may not be enough to take Pax to the promised land.