NBC Seeks 32% Stake in Paxson Despite Industry Skepticism

NBC Inc. is in advanced negotiations to take a 32% equity interest in Paxson Communications Corp. despite industry skepticism about whether the deal makes sense, according to sources at the network.

Under the negotiations, first reported last week in Broadcasting & Cable Online, NBC would buy the stake, which has a current market value of more than $300 million, as a precursor to taking full control of Paxson when federal laws permit.

While federal station ownership guidelines revised two weeks ago allow a minority partnership between two of the nation’s largest station groups, many industry executives are doubtful that a deal can be worked out because of Paxson’s financial instability, the top price demanded by founder Lowell “Bud” Paxson and NBC parent General Electric Co.’s wariness of alliances where it does not have management control.

Analysts also question the value of investing in broadcasting with a coming glut of distribution capacity. “These new rules are much ado about nothing,” said David Smith, president of Frank N. Magid Associates, a Los Angeles-based media research and consulting firm. “It would be different if there were limited spectrum, but we are on the cusp of a digital era in which there will be spectrum flowing over the spillway. Why buy another station when you have six new digital channels in every one of your markets that you don’t know what to do with?”

Indeed, each of the nation’s broadcasters received digital spectrum last year from the federal government to convert their antiquated analog systems to new state-of-the art technology. Even after delivering high-definition signals with prettier pictures and sound, stations will have channels left for time-shifting programming or for all-news and weather formats.

Now, under new ownership rules enacted by the Federal Communications Commission, the four top-rated stations in a market can buy a weaker outlet if eight other stations remain after the purchase to ensure a diversity of voices. The rules are designed to help broadcasters, which face increased costs because of digital conversion, achieve greater efficiencies by combining operations.

They also allow the networks, which own the nation’s strongest stations, to take a minority 32% stake in such a group as Paxson without having its stations count toward its ownership totals. That provision allows the networks to expand without violating rules that prevent them from controlling stations that together reach more than 35% of the nation’s households.

Despite predictions of consolidation, however, many network executives see limited value in the new rules because the most desirable pairings would be in the biggest markets with the strongest second-string stations--in most cases the WB and UPN affiliates. Their owners, Tribune Co. and Chris-Craft Industries Inc., have not been interested in selling.

That leaves Paxson and USA Networks Inc., which owns 13 weak stations, as next in the pecking order because of their vast reach in the largest markets. But sources say their marginal ratings and sales means that the efficiencies from pair-ups would be minimal.

One source at Fox Broadcasting Co. said Paxson’s long line of creditors presents another challenge. Paxson, which signed lavish programming deals to launch a new network last August based on wholesome values, has already renegotiated terms with some Hollywood suppliers because of liquidity problems resulting from its low ratings and poor advertising sales.

Yet Chairman Paxson has been declaring his company as “the prettiest girl” at the “duopoly” dance since the FCC ownership revisions. The stock, which has jumped 20% since the revisions, fell $1.19 to close at $15.06 Friday on the American Stock Exchange. Analysts say Paxson claims he could sell his New York station alone for $1 billion.

While Paxson and NBC both have stations in nine of the top 50 markets, sources say NBC is not looking at the transaction as a “duopoly” play. Rather, NBC would use the 40 Paxson stations that do not overlap with its own to replace certain affiliates and reduce the $200 million a year it pays to stations in compensation fees for carrying its signal. Once affiliate contracts expire, NBC could put its network programming on the Paxson stations in Boston, San Francisco, Seattle, Detroit, Atlanta, Houston and other major cities.

But industry sources say switching to weak Paxson stations would severely hurt NBC’s ratings and advertising income. NBC would be better off, they say, taking its programming to cable, collecting subscriber fees from operators to make up for the 30% of the nation’s viewers who refuse to pay for television.

Some sources say cable executives within NBC are pushing the Paxson deal, eager to use the stations to carry ValueVision International Inc., the struggling home-shopping cable channel in which NBC owns a 39.9% equity stake. ValueVision would then be renamed SnapTV, to tie in with the Internet portal that NBC is building.