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NBC buys Paxson stake
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September 16, 1999: 2:01 p.m. ET
$415M buys1/3 of broadcaster for GE unit, option to buy control by 2002
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NEW YORK (CNNfn) - NBC, eyeing a new distribution channel, agreed Thursday to invest $415 million in Paxson Communications for about a one-third stake in the upstart network as it held out the possibility of buying total control in three years.
NBC's investment, which was widely expected, could be raised to a minimum of $1.2 billion total by 2002, Lowell "Bud" Paxson said in a conference call with reporters Thursday morning. However, Federal Communications Commission officials must ease station ownership rules before NBC can do that.
The investment paves the way for NBC to offer programming such as miniseries and specials to Paxson. Paxson programming chief Jeff Sagansky said he is particularly coveting profitable local news programs from NBC's regional stations that Paxson could re-broadcast over its airwaves.
Paxson owns a stake in 72 stations, and provides PAX-TV family-oriented programs such as "Touched by an Angel" and "Dr. Quinn: Medicine Woman" to 51 other stations across the nation.
For its part, NBC gains a new route into viewer homes through Paxson's airwaves and scores key leverage to negotiate with local affiliate stations that NBC has been asking to help pay for programming.
"Today's investment is another step in our effort to seek out new platforms for NBC programming and content," said NBC President Robert Wright.
The NBC-Paxson pact, the latest sign of consolidation in the media business, comes just a week after MTV owner Viacom Inc. (VIA.B) announced it plans to purchase CBS Corp. (CBS) for $36 billion.
The two deals were made possible by key FCC Commission rule changes last month to allow one network own a stake in more than one TV station in a single local market.
But FCC rules still limit a network's ownership of stations to markets that reach a total of 35 percent of the U.S. population. As the rules now stand, buying a stake of more than 32 percent in Paxson would put NBC over that limit at about 40 percent.
As part of the deal, the so-called "Peacock Network" will fund a special class of Paxson preferred stock convertible at $13.01 per share, which would give it a 32 percent stake in Paxson.
While the price is beneath Wednesday's closing price, Bud Paxson said that was above the average price during talks before the FCC changed the rules last month. Negotiations began last February, but accelerated after the FCC rule change, he said.
Shares of West Palm Beach, Fla.-based Paxson (PAX) fell 1-1/16 to 14 in trading Thursday. NBC parent company General Electric (GE), one of 30 stocks in the Dow industrial average, gained 1-1/4 to 117-1/4..
Analysts said the value lies over the longer term.
"You have to look beyond the initial stake to get excited about it. The upside comes later," said Jim Marsh, an analyst at Prudential Securities, who has a "strong buy" on Paxson shares. "If I had a sense that this was going to be the only deal, I would be disappointed, but it is very clear that this is a multi-step deal."
Importantly, Marsh said Paxson officials told him there's a provision that would allow Paxson stations to become NBC affiliates. "It all amounts to a huge stick for NBC. [The deal] can be used as a lever against the affiliates."
NBC will be able to gradually ramp up its stake in four steps. After the original 32 percent stake, it will be able to raise that to 35 percent, then 43 percent, then to a total of 49 percent.
Raising the stake from 35 to 43 percent stake would require NBC to pay either $20 per share or the market value of the Paxson shares at that time, whichever is higher.
After Feb. 1, 2002, NBC can acquire stock equal to a total of 49 percent of Paxson -- including the right to buy Bud Paxson's controlling stake. That would carry with it 67-percent voting control of Paxson. The minimum price for that is $22.50 a share.
All of those purchases beyond the original 32 percent stake, however, are contingent on changes to FCC rules. "NBC is trying to skate where the puck is going to be," Marsh said. 
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