Tensions grow despite improved financials

Paxson Communications mustered an improved plate of operating results for the fourth quarter and full year 2003 and promised major changes to its programming lineup thanks to help from 32% shareholder and partner NBC.

Still lumbering under $1 billion in debt, the West Palm Beach, Fla.-based broadcaster-programmer announced late Tuesday that it managed to generate positive cash flow for fiscal 2003 thanks to extensive cost cutting at its foundering programming net.

With several station sell-offs in the past year, total revenues for the year fell 2% to $276.9 million, down 3% in the last quarter to $82.4 million. Net loss for the year was reduced only marginally, to $143.3 million, compared to a 2002 loss of $146 million. However, operating cash flow was $32.9 million, up from a negative $75 million in 2002.

“We have made significant strides,” CEO and founder Lowell “Bud” Paxson told analysts on the evening conference call. As for its recently announced NBC “consulting” relationship, Paxson said the network will handle its upfront ad sales efforts in May and is working on several original programming projects with the Peacock. He said the “limited increases” in future programming spend would be offset by improved ad sales.

Paxson said that while the company would continue to work with NBC to improve its programming prospects, strategic alternatives being considered for the company include an outright sale or merger of the business, station asset sales or a deal with a third party that would take over programming of the Pax network.

In fact, Paxson Communications’ days as an independent station owner and programmer look numbered, and its relationship with NBC seems to be getting increasingly contentious (in spite of the recent programming détente).

Last November, the Peacock notified Paxson that it intends to exit its 32% stake in Pax and expects to get a previously agreed $550 million for its preferred stock by September. Pax insists its under so such obligation.

The wording of the ownership contract between the two companies is a bit murky. Paxson maintains it has up to one year after Nov. 13, 2003 to consummate the preferred stock redemption. But if it is financially unable to do so under its debt covenants, NBC can try to sell its minority stake to a third part.

But whether or not NBC can force Paxson to pay up next year may be an irrelevant point. The company’s financial health has declined precipitously since NBC bought its stake in 1994 for $415 million.

“Legally, we don’t have a dispute with NBC. The agreements speak for themselves,” Paxson said on Tuesday.

Analysts say it’s unlikely any buyer would pay anything close to the redemption value implied by NBC’s preferred stock contract. And even if the Peacock tries suing Pax to make it pay up, said one legal source, it could bankrupt the company, rendering NBC’s equity position virtually worthless.

Sources say NBC and Pax have talked about the possibility of ceding certain TV stations to NBC as alternative payment.

In a recent credit ratings note, Standard & Poor’s tacitly acknowledged that NBC can’t necessarily force Paxson to cough up a half a billion dollars any time soon. The ratings arbiter is nevertheless concerned that the heavily indebted company may not be able to pull off an outright sale or any other “meaningful transaction” that would boost liquidity.

Paxson last year retained Bear Stearns and Citibank to seek “strategic alternatives”, but so far no buyer has been willing to bite given the hefty $1 billion debt load. Its primary value lies in the 63 owned and operated stations, or more specifically, the “must carry” rights their broadcast status could grant a buyer looking to launch a new national cable network. But critics say many of the Paxson stations are weak UHF stations and that a network could simply spend $1 billion to buy cable distribution without needing to buy the whole company.

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