Paxson seeking exit after NBC acquires Telemundo. (Media & Technology).

If you thought NBC was a passive investor in Paxson Communications Corp., you probably believe in the Tooth Fairy, too.

The Federal Communications Commission admonished NBC, a unit of General Electric Co., for its conduct after NBC acquired nonvoting shares in the fledgling broadcast company in September 1999.

NBC sent e-mails, made demands and used its own nominees to the Paxson board to attempt to influence the company's course, according to an FCC opinion. At one point, the NBC-nominated directors refused to discuss or vote on a debt-refinancing plan for Paxson without conferring with NBC's general counsel. They did not act independently on behalf of Paxson shareholders, the FCC concluded.

But NBC will get no more than a written rebuke from the FCC, because the NBC nominees have resigned from the board.

There's not much to fear from the FCC, which is under attack from a federal court, outspoken politicians and industry leaders who want to see most, if not all, restrictions on ownership eased. Instead, Paxson will look to an arbitration proceeding this month to resolve its soured relationship with NBC.

Sweet deal

When NBC invested $415 million in Paxson in 1999, it looked like a brilliant move. For its money -- chump change for a GE division -- NBC acquired a 32 percent economic interest and the right to buy out founder Lowell "Bud" Paxson if federal restrictions on TV ownership ever loosened.

In NBC, Paxson gained a savvy investor that could handle advertising sales and contribute programming, in addition to providing a potential exit strategy for the struggling broadcast company.

In its first 12 months, Paxson had reaped less than half the ad revenue that it had predicted at the launch of the "family friendly" network in August 1998. But NBC saw potential in the idea of recycling its news, sports and other programming on a second station in many markets (including L.A.)

More than anything, Paxson offers national distribution, by owning 65 full-power television stations that reach 64 percent of the nation's TV households. (Most Paxson stations have UHF signals, which the FCC discounts by 50 percent when it calculates whether a company exceeds a rule limiting ownership to 35 percent of the national audience).

Paxson says its network programming reaches 85 percent of the national audience with the help of affiliated stations and cable and satellite-television distribution.

Paxson's prime time rating, or the percent of the nation's TV households watching PAX TV in an average minute, has inched upward to .9 in the season-to-date, according to Nielsen Media Research, compared to .7 in its first year. It is now on a par with cable networks like Fox News Channel and A&E, and attracting more viewers than the ABC Family Channel.

Infomercials

The company still voices its commitment to programming that is "free of excessive violence, explicit sexual themes and foul language," which evidently has curbed its appetite for using much of NBC's programming.

Paxson's prime-time schedule offers original programming like "Miracle Pets" and reruns of "Touched By An Angel" and "Diagnosis Murder," but 49 percent of Paxson's revenues in 2001 came from infomercials, according to the company's 10-K filing with the Securities and Exchange Commission.

Paxson relies on NBC to handle the bulk of its advertising sales, marketing and network research. As a result, Paxson reduced its workforce to about 10 employees per station, compared to 90 employees at major network affiliates or 60 employees at independent stations.

The company would have to ramp up its operation or find a new investor if the deal with NBC unravels, but Paxson wants a divorce now that NBC has acquired Telemundo Communications Group Inc.

Paxson initiated an arbitration proceeding in December, complaining that NBC breached its agreements when it agreed to acquire Telemundo because that deal would prevent NBC from following through with a purchase of Paxson.

Telemundo operates 11 full-power TV stations in many of the same markets where NBC also owns stations. Current FCC rules prohibit the addition of a third station in the same market. But NBC could continue to own less than 33 percent of Paxson because the FCC doesn't count such investments as ownership.

Without the lure of an eventual buyout, Paxson loathes the idea that NBC might retain its investment and its ability to exercise "a significant influence" over its operations. Under its 1999 agreement, Paxson must obtain NBC's consent when it approves annual budgets or makes "material" acquisitions of programming or assets or issues capital stock.

In August and September of 2001, Paxson received e-mails from NBC General Counsel Lawrence Tu asking for the agenda of an upcoming Paxson board meeting. Tu asked to add an additional item to the agenda.

The FCC refused Paxson's request to withhold approval of the NBC-Telemundo deal. Now Paxson seeks relief from an arbitration proceeding this month, saying it may learn the outcome by late May.

Wachovia Securities analyst Bishop Cheen says he expects that Paxson and NBC will eventually part company, freeing Paxson for a new suitor.

"Disney or AOL Time Warner would be my logical guess," Cheen said, but he doesn't rule out Fox Entertainment Group,

Tribune Co. or a big cable TV operator like Charter Communications Inc. or Comcast Corp.

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