NEW YORK — Paxson Communications appears well on its way to digging itself out of financial hole, based on second quarter financial results disclosed late Wednesday that showed the fruits of aggressive program cost-cutting and proceeds from a few select station sales.
But a little-discussed religious programming affiliation obligation tied to most of its 64 wholly owned TV stations could threaten to undermine the company’s value as it contemplates wider-scale disposals and other strategic tie-ups to ease its debt load and stay liquid, say legal experts.
Company patriarch Lowell “Bud” Paxson co-founded not-for-profit programmer the Christian Network in 1992 and in 1999 signed binding affiliation agreements with virtually all of the Paxson-owned stations committing them to broadcast CNI programming in the overnight hours from 12-5 a.m. Under those terms, any acquirer of the Pax stations are obliged to maintain the programming.
The overnight CNI affiliation agreement has been the subject of three legal actions in recent years contesting the contract, including Spanish-lingo net Univision’s 2002 purchase of Paxson’s Fresno stations. At Univision’s request, the FCC approved the deal but is currently reviewing the arrangement to see whether such a perpetual contract is a permissible affiliation agreement.
An independent appraiser has valued the Pax TV stations at $2.9 billion-$3.1 billion, though several analysts question whether the cumbersome affiliation deal might seriously impede value. Paxson, who got his TV start as co-founder of the Home Shopping Network, is said to be committed to the Christian Network above all and may not be willing to unwind the burdensome obligation.
Until recently, the company had expected minority shareholder NBC to pick up its option to buy control of its 63 full-power stations. The Peacock has so far declined, and Paxson has since hinted he would look to unwind the NBC agreement amicably.
Paxson recently retained investment bank Bear Stearns to explore strategic alternatives for the company that could include selling all or part of its assets to one or more parties, a full-scale capital restructuring or sale of a minority stake in the parent company. Paxson is optimistic that the current dealmaking climate among entertainment companies will improve prospects for a sale. He also said he’s taking a “wait and see attitude” on FCC deregulation that may further whet buyers’ appetites.
But some analysts are not so sure, citing NBC’s lack of interest in making an imminent offer for the stations, and the past legal cases that have struggled to null the Christian programming clause.
“The contract absolutely impairs value … there are far more profitable things you can do with that five hours of airtime,” said one banking source, noting that such a perpetual contract would restrict a buyer’s ability to sell infomercial or other programming in those slots.
NBC did not return calls seeking clarification about its intentions on Paxson, in which it holds a 32% stake and option rights to buy control or exit.
Paxson reiterated the company’s plans to seek a major strategic deal but insisted the company was in good financial health and on course to meet all its interest payment obligations.
In addition to its Pax TV programming network, which passes 94 million U.S. homes, Paxson’s portfolio includes O&O stations reaching 64% of the U.S., including stations in all of the top 20 markets. Major cutbacks at its struggling program network and some syndication sales have helped the company improve its cash position in the last quarter.
Company saw its second consecutive quarter of free cash flow and cut its net loss by more than 70% to a loss of $17 million in the quarter ended June 30. Bud Paxson reassured investors Wednesday that his TV station and national program network group are in a strong liquidity position and says the company should end the year with $100 million in cash in the bank.
Company reported operating income of $33.5 million compared to a loss of $14.45 million last year. Gross revenues for the quarter were up 2% to $76.9 million.