NBC Universal has cut a deal that would give it control of ailing Paxson Communications and set the stage for restructuring the company’s crippling debt load.
Bud Paxson, who has resigned as Chairman and CEO as part of the restructuring, gave NBC an option to acquire his controlling stake in the company. That option expires in 18 months.
Paxson also agreed to step down. Brandon Burgess, executive VP of business development, has resigned from NBC Universal to take over as CEO of Paxson, and to become a director of that company, though an NBC spokeswoman said that was an independent decision.
Dean Goodman remains president and COO of Paxson under a new three-year deal.
"NBC Universal has been the largest financial investor in Paxson Communications for some time, and we continue to believe that Paxson Communications has a compelling national platform," said Bob Wright, chairman and CEO of NBC Universal, in a statement. "This agreement gives Paxson Communications the flexibility to invite new partners and investors who do not face the same FCC limitations that we do and who are interested in investing in and programming a nationwide television distribution platform."
The companies have settled all outstanding litigation, according to NBC U. The two partners have been battling in court over Paxson's decision to change the name and programming direction of its struggling netlet.
NBC also agreed to restructure the terms of Paxson preferred stock it owns.
Paxson is the sputtering dream of Bud Paxson, co-founder of Home Shopping Network. After amassing a giant collection of weak UHF stations and loading them with infomercials and TV preachers, Paxson tried to strengthen them by teaming with NBC to create a substantial entertainment network.
NBC first invested in Pasxon Communications in 1999, buying $415 million worth of preferred stock convertible into 32% of the company’s shares. Because Paxson Communications owns so many TV stations, FCC ownership rules precluded NBC from owning the company outright, but it could advise on programming and handle ad sales.
But the network, now renamed from Pax TV to i (for independent) fizzled. It cut 50 staffers last February, then came a filing with the SEC that the company was "not currently investing substantial additional amounts in new entertainment programming and are evaluating other programming strategies and opportunities that might be available to us that could improve our cash flow."
NBC claimed that violated the terms of their partnership, sending the two companies to court. Meanwhile, a financial crisis looms as parts of Paxson’s interest payments on $2 billion in debt start accelerating next year and the company has no way to start paying or refinance the bonds.
Paxson has been looking for a way to get some money out of his stations for years, most recently by attempting to shop them and pushing for dual digital-analog must carry, which would make the stations more valuable either to himself of potential buyers.
Initially, Paxson was looking to realize a windfall from stations he owns in the 60-69 band. He had planned to broker deals with wireless providers for his early exit from those channels, but the FCC dashed those hopes by delaying the auction of that upper spectrum (which is not being auctioned until 2008, according to the current congrssional timetable).
The new deal with NBC does nothing immediately to lessen Paxson Communication's financial pain, but will let Burgess start negotiating with investors.
However, unless FCC rules change dramatically in the next 18 months, NBC still won’t be able to fully own Paxson and its stations. It has the option of transfering that right to a third party within those 18 months if the FCC rules don't change.
The power of Paxson lies in its digital broadcast capacity. To most people, Paxson is largely an infomercial station. But Burgess sees a distribution path into 90 million analog homes through must-carry and retransmission agreements with cable and DBS operators. When digital television is universal, that single channel in 90 million homes could become four to six channels.
Paxson has obviouly had problems programming even one channel, but Burgess suggests that outside programmers might ultimately partner with Paxson or lease capcity. "I think people have figured out that launching digital networks is harder than expected," Burgess says.
Burgess called the debt restructuring "relatively straightforward," though it will be an arduous process. He expects to spend a year or so figuring out how to program the network and stations.
Then comes the long-term digital strategy
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