Pax TV's War with the Peacock


By Ronald Grover He's against sex, violence, and TV shows that rile parents and old folks. In short, Lowell "Bud" Paxson, the 66-year-old chairman of Paxson Communications (PAX), is unlike any TV executive you're ever going to meet. His three-year-old TV network, Pax TV, features five days a week of Touched by an Angel reruns, uplifting shows with titles like It's a Miracle, and a program about warm, fuzzy animals that's called -- what else? -- Miracle Pets. Pax TV wants to bring family values into your living room.

It may all be sunshine and light on the screen. But Bud Paxson is fast shaping up as one of the biggest operators in the entertainment world -- and a six-foot-two pain in the posterior for NBC. Since December, he has been angling to sever a two-year-old agreement with NBC that Paxson says would allow the Peacock network to buy his string of 65 mostly UHF TV stations.

The drama will play out in a legal arbitrators' office in San Francisco in April. Hanging in the balance may be a heck of a bidding war for those TV stations and the Pax Network, which averages about 1.3 million viewers a night, or about one-tenth the number who tune into NBC.

DEALS WITHIN DEALS. Paxson's feud with NBC dates back to September, 1999, when the one-time head of the Home Shopping Network was striking deals to buy just about any TV stations he could lay his hands on. With debt rising, Paxson signed an agreement with NBC that gave him $415 million in exchange for giving the Peacock a stake in Paxson Communications. According to the Paxson proxy, NBC held warrants that allowed it to buy up as much as 32% of the company. In his filings, Paxson also says NBC has the right to buy control of the company from the chairman through supervoting stock that Paxson now controls.

Paxson and NBC also signed several ancillary deals that allow NBC to sell advertising time for the Pax network, thus cutting down on Pax's administrative costs. They also agreed to allow Pax to air its shows after they have first run on NBC's own stations.

Last year, for instance, executives at Pax found a British game show, The Weakest Link, and brought it to NBC's attention. NBC paid to make the show, and aired it on its own network. Paxson gets half the revenue from syndication of the show's reruns. And before the show went into reruns, the Pax network also got a chance to air it, at a hugely reduced rate.

TELEMUNDO'S ROLE. At first glance, the arrangement seems like a match made in, well, heaven. And if everything had worked out the way it was planned, NBC would have stepped forward to buy the piece of the company that it didn't already own. With the coming 500-channel world of cable and satellite TV, even those weak-sister Pax stations could soon be seen just about everywhere. "The object was that NBC would buy this network," Paxson now says. "I gave them the show that made them No. 1, and what did they give me?"

In fact, a funny thing happened on the way to the altar. In October, 2001, NBC paid Hispanic TV network Telemundo $2.7 billion in cash and assumed its debt, adding eight TV stations to its stable along with the nation's second-largest Hispanic network. Paxson didn't like what he saw. He filed arbitration claims against NBC in December, saying its purchase of Telemundo "would make it virtually impossible for NBC to complete its path to control Paxson."

He also asked the Federal Communications Commission in Washington to make NBC drop its bid to buy Telemundo. NBC, which declined to comment for this story, expects its Telemundo deal to close in April.

FORCED SALE? So what's Bud Paxson up to? In his filings, he claims that, by buying Telemundo, NBC is playing with federal rules that don't allow it to own more than two stations in New York, Los Angeles, Chicago, Miami, and Dallas -- cities where both Telemundo and NBC already own stations. That would force Paxson to sell his own stations in those cities in order to go forward with the NBC deal, Paxson claims, thus reducing his company's value. NBC, the Pax filing says, is trying to "exert leverage to force Paxson to restructure the arrangement so as to provide even more favorable terms to NBC to the detriment of Paxson's shareholders."

It's possible, though, that Paxson just sees a better deal on the horizon -- if he can get out of NBC's clutches. On Feb. 12, a federal appeals court loosened restrictions on how much territory one company can cover with its TV stations. That means several media giants that had been shut out from further acquisitions -- such as CBS parent Viacom, ABC parent Walt Disney, and others -- may now be on the prowl for TV stations that could one day be digitally enhanced to beam dozens of channels from a single transmitting tower.

The same court decision also struck down rules that had limited cable companies from owning TV stations, so AOL Time Warner and other cable behemoths might also be interested in Pax.

POTENTIAL BIDDER. All of which would be good news for Paxson -- if he can jettison that deal with NBC. In 1997, he sold a string of 46 radio stations and 500 billboards to Dallas-based Clear Channel for $629 million, at the time a record for a radio deal. Paxson Communications would almost certainly be worth a bundle more.

At least one potential bidder, MGM studio Chairman Alex Yemenidjian, has already said he would be interested in the chain if Paxson was free to make a deal. "Since Alex made that statement, we've had a lot of interest," Paxson says. "And we'll be talking to every one of them, just as soon as we sign that paper" to end its relationship with NBC.

No one is going to come running to Pax TV solely on the basis of its performance. On Feb. 19, the company reported $308.8 million in revenues for 2001, slightly beating the Street's expectations, with a 2% decline in ad sales. It lost $157.7 million last year, even though it showed some upbeat news -- a positive cash flow of $18 million, after eating up $4.9 million in operating cash.

Investors are only moderately interested in the company's stock, up 10%, to $10 a share on Feb. 28. "I think everyone is waiting to see how this NBC thing comes out," admits Paxson, whose company is valued at $650 million by the market. But some savvy investors, like Mario Gabelli, have bought into the stock. You know Gabelli isn't coming for the Touched by an Angel reruns. If Paxson can rid himself of NBC, however, an angel may really be looking out for him and his investors. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online


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