NBC Should Play a Key Role in Take 2 for PAX TV.

The first-year results are in: PAX TV flunked its business plan.

Ad revenue was barely half of what Paxson Communications Corp. had projected when it started the network with its "family friendly" programming in August 1998.

So what? A business plan can be rewritten like a Hollywood script. Paxson recently told Wall Street analysts that the fortunes of its struggling network will change with the help of General Electric Co.'s NBC television unit, which paid $415 million in September for a 32 percent stake.

Like a rich uncle, NBC is taking Paxson under its wing. NBC will handle network and national sales for Paxson Communications, and it will direct the company's local sales in certain markets, beginning with Providence, R.I. and Washington, D.C.

Some NBC programming -- including news -- may migrate to PAX TV, if deemed suitable for the network founded by Paxson Chairman Lowell "Bud" Paxson, a self-styled born-again Christian.

NBC has the right to buy all of Bud Paxson's controlling stock, including his holding of all the Class B shares, which give him 58 percent of the voting power. For that reason, analysts call this a creeping takeover. NBC has no obligation to buy out the minority shareholders, which helps explain why Paxson shares have languished in the $10 to $12 range lately, down from about $16.50 in September before the NBC deal was announced.

NBC calms fears

Indeed, one disgruntled shareholder has already filed a lawsuit in Delaware, alleging that Paxson wrongfully spurned an offer of $20 a share for the entire company by Fox Entertainment Group. But evidence of such an offer has yet to be aired. (The suit was filed by Joe Dresdner as a class action on behalf of all shareholders.)

Meanwhile, some analysts are relieved that NBC stepped in. Paxson's operating losses in the 12 months ended Sept. 30 were $266 million.

"Without a partner like NBC, investors would have trouble sleeping at night with PAX TV," says Bishop Cheen, an analyst with First Union Securities Inc. in Charlotte. He is hopeful that NBC will buy the entire company if TV ownership rules are relaxed.

The initial NBC investment was made possible in August by the Federal Communications Commission's decision to relax the way investments in TV stations are "attributed" in tallying the national ownership cap, which is set at 35 percent of the national audience.

Under the new "attribution" rule, NBC's 32 percent stake in Paxson is not counted, despite the fact that Paxson owns more than 70 TV stations. For now, both companies appear pleased with their arrangement: the emphasis is on "family" and "friendly."

First, the family. Paxson has announced that it will buy nine TV stations from DP Media Inc., which is owned by family members of the Paxson chairman. The purchases may cost as much as $173 million.

NBC has blessed the deal and will negotiate the price (or rely on binding arbitration) to avoid any appearance of self-dealing, the Paxson chairman told analysts in a conference call.

DP Media purchased most of its TV stations from Paxson Communications or with the company's financial help. As of Dec. 31, 1998. Bud Paxson was a guarantor on $31 million of bank loans to DP Media, which is headed by his son, Devon, and daughter-in-law Roslyck Paxson.

During the three months ended Sept. 30, Paxson said it advanced funds to help DP Media with its operating cash-flow needs.

More changes afoot

DP Media's stations are located in Battle Creek, Mich., Raleigh, N.C., Hartford, Conn., St. Louis, Milwaukee, Washington, D.C., and Indianapolis.

There are other changes. Jeff Sagansky, the president and chief executive, had to give up his 5 percent profit participation in Paxson-created programming when NBC came aboard.

In turn, Paxson gave Sagansky a new contract, which reduced the exercise price of his existing 840,000 unvested stock options to 1 cent, and 360,000 vested stock options to $1. As a result of the option repricing, the company recognized stock-based compensation of about $8 million for the quarter ended Sept. 30.

Paxson formulated its family friendly format before Sagansky joined the network in June 1998. That month, Paxson raised $261 million from the sale of cumulative and convertible preferred stock to prepare for the network's launch.

Initially, the company relied on reruns of series like "Highway to Heaven," "Dr. Quinn, Medicine Woman" and "Diagnosis, Murder." But in the quarter ended June 30, the company took a $70 million writedown for old shows like "Love Boat" and "Barnaby Jones," which it decided it could not use.

Paxson didn't deliver

Neither the ratings nor the advertising market shaped up the way Paxson envisioned the first year. The, company aimed for a 1.0 primetime rating in total households, equal to 1 percent of TV households, with projected revenue of $456 million. Instead, it ended the first broadcast year with a 0.7 rating, and ad revenue of $211 million for the 12 months ended Sept. 30.

Paxson couldn't deliver on its pledge to turn cash flow positive in its first broadcast season.

"Clearly their strategy as an independent seventh network doesn't seem to be financially feasible. They were not meeting their expectations," says First Union's Cheen, who has tracked the company closely. "There's no assurance that the economics will work having NBC in there."

Whether by accident or design, Paxson has another shot at success with NBC. "PAX TV, Take 2," says Cheen.

Kathryn Harris is a columnist for Bloomberg News.