Caught in downturn, Paxson rues partnership with NBC. (Media & Technology).

Lowell "Bud" Paxson said his company was the "prettiest girl at the dance" when broadcast TV companies began pairing off in 1999.

But as others marched to the altar, Paxson Communications Corp. made a living arrangement with NBC that it has come to rue. Last week, an arbitrator rejected Paxson's latest effort to end the affair, leaving the company with no foreseeable solution for the next year or two.

Paxson is stuck with its 1999 agreement with NBC, which permitted the General Electric Co. subsidiary to buy 32 percent of Paxson and recycle some NBC programming on its 65 stations (including KPXN, Channel 30, in Rancho Cucamonga). Paxson won't have the right to buy back the NBC stake until 2004. NBC can't buy the remainder of Paxson unless the Federal Communications Commission eases ownership rules in a proceeding that could last until 2003.

With this impasse, investors have turned a cold eye on Paxson's results from the family-friendly PAX TV network, which averaged less than 1.0 in prime-time ratings in each broadcast season since its 1998 launch. The stock has declined 75 percent this year, trading below $5 for the past three months.

Asset sales

Bank debt and senior subordinated notes totaled $868 million on June 30. The company has vowed to sell assets worth $100 million to assure liquidity for the next 12 months. To that end, Paxson recently announced agreements to sell two stations to NBC: KPXF in Fresno for $35 million and WPXB in Merrimack, N.H., for $26 million.

The sales will still leave Paxson in control of 63 TV stations without harming the backbone of its national distribution system. In the case of WPXB, for example, Paxson owns another station, WBPX, which airs its programming in the same greater-Boston market.

Bishop Cheen, a high-yield debt analyst with Wachovia Securities, estimates that Paxson's assets could sell for $3.25 billion if the stations sold at just 50 percent of the average price per home of 14 recent station and network transactions.

But with its depressed stock price, Paxson's public market value has fallen below $170 million.

There's no doubt that NBC struck a clever deal. It gained significant access to Paxson's 65 TV stations without having its 32 percent stake "attributed" to the count of NBC-owned stations nationwide.

NBC made its Paxson investment one month after the FCC relaxed the way the agency counts investments in TV stations for the national ownership "cap," which limits a broadcast company to 35 percent of the national audience.

Other companies took advantage of the FCC's decision in August 1999 to permit common ownership of two TV stations in a local market. The agency's "duopoly" rule had previously restricted ownership to a single station.

The "duopoly" dance was soon under way. Viacom Inc. paid $50 billion to acquire CBS Corp. News Corp. paid $5.35 for Chris-Craft Industries Inc. and two affiliated companies. USA Networks Inc. sold its station group to Univision Communications Inc.

Unfaithful?

Then, in October 2001, NBC announced it would buy Telemundo Communications Group Inc., with 11 TV stations in many of the same markets where NBC owns stations. NBC was using the "duopoly" rule to acquire a company other than Paxson. Paxson tried to block the deal at the FCC. The West Palm Beach, Fla.-based company contended that NBC had breached its agreement because the Telemundo deal would create regulatory hurdles for NBC to acquire the rest of Paxson. The agency approved the sale, and NBC paid $2.7 billion in April for the second-largest U.S. Spanish-broadcaster after Univision Communications Inc.

In a memorandum opinion and order issued in April, the FCC recounted Paxson's complaints about NBC's conduct in its boardroom, asserting NBC had made demands and used its own nominees to try to influence Paxson's course of direction. Paxson argued that NBC should be forced to "attribute" its Paxson stake toward its national audience cap. The FCC concluded that NBC-nominated directors didn't act independently on behalf of Paxson shareholders. But there was no penalty. The FCC gave NBC a written admonishment, noting that its nominees had resigned from the Paxson board.

Paxson said last week that it has engaged Bear Stearns to study the company's options. But with the current impasse, it will be hard for Paxson to recruit a buyer. With so many broadcasters already paired up, the list of likely candidates has shrunk.

Walt Disney Co. is the most obvious, since its ABC unit is the only major broadcast network company that has not utilized the FCC's relaxed duopoly rule to buy second stations in major markets. Disney, coping with its own depressed stock and troubled ABC ratings, seems unlikely to make a $3 billion acquisition in the near future.

That leaves NBC, which might be able to acquire Paxson depending on which FCC rules are eased. There's widespread doubt that the FCC will go so far as permitting common ownership of three TV stations in a local market.

"We don't think triopolies will be allowed even with the FCC rule changes that are coming in the spring," said Paxson Chief Executive Jeff Sagansky.

There might yet be a happy ending.

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