A failed attempt to launch a Spanish-language network and unhappy lenders have forced Harry Pappas and his station group into bankruptcy and led to a fire sale of TV stations that took four decades to accumulate.
Pappas Saga Turning Into Tragedy
Can a hard-driving Greek-American entrepreneur who built a media empire from a single radio station make good in the take-no-prisoners arena of modern television broadcasting?
Or will he ride his own ambition too hard and run head-on into the dark side of the American dream?
Plot line for a new fall network show? Nah. The real-life drama of a modern-day bankruptcy–the story of Harry J. Pappas and the station group, Pappas Telecasting, he created from the humblest of beginnings.
And for the latest sad chapters in the saga, you’ll have to turn to the U.S. Bankruptcy Court in Delaware. Beginning with Pappas’s Chapter 11 filing on May 10 of this year, the story plays out in prose so dry it would make your throat sore.
In the initial filing, the Fresno, Calif.-based station group acknowledged that it had more than $536 million in debt and assets worth only about $460 million.
Most of the debt is held by a group of lenders led Fortress Credit Corp. that lent Pappas $284 million in March 2006 and are battling to get their money back.
These secured lenders aren’t the only ones pounding on Pappas’s door.
The company also owes unsecured creditors nearly $6 million. They include Fox Broadcasting, CBS, Nielsen Media, Telerep, Warner Bros., ASCAP, Buena Vista Television, BMI, Harris Corp., The CW, Carsey Werner and various law firms.
Fortress says in court filings that it gave Pappas and the company every break, letting them go five months without paying interest, overlooking broken loan covenants, allowing Harry Pappas to retain operational control of his companies, engaging in “endless negotiations.”
In return, Fortress says, “Pappas repeatedly balked to extract personal gain from the Lenders.”
Their biggest complaint: Pappas schemed to take $2 million owed the creditors, dress it up as debtor-in-possession (DIP) financing, and lend it to his own bankrupt company. In return, he would have received administrative fees and expenses for providing the financing.
That, Fortress says, “demonstrates the virtual boundlessness of Pappas’s deceit.”
Harry Pappas declined a request to be interviewed for this story. Steven Alfieris, vice president/special counsel for Pappas Telecasting, likewise declined to talk about Pappas or the bankruptcy.
Pappas’s colleagues in the industry are saying little, other than the bankruptcy is a tough break for a hard-working, entrepreneurial guy.
“He is a real American success story and, I think, a pretty good guy of high integrity,” says Mark Fratrik of BIA Financial.
Fratrik says he has known Pappas for about 15 years, since they became acquainted while Fratrik was at NAB. Fratrik says Pappas is generally respected in the industry as a competent station operator.
But, he adds, “This is the marketplace in action. Companies file bankruptcy all the time. Companies fail all the time. This failure allows other to succeed. It’s a challenging time.”
Two images of Harry Pappas emerge from interviews with industry insiders. One is Pappas the good guy, an energetic, creative entrepreneur. The other: Pappas the hardnosed, often stubborn financial engineer who works all the angles.
Pappas’ detractors declined to talk on the record. No one wants to be seen as kicking the guy while he is down.
And Pappas is definitely down for the moment. How did he get there? It’s a story that starts with a strong dose of irony. His first foray into station ownership came in the mid-1960s when he and brothers Pete and Mike bought KGEN-AM Tulare, Calif., a station that had fallen into bankruptcy.
Over the years, the station group accumulated more than two dozen TV stations, many affiliates of the major broadcast networks.
In 2000, Pappas Telecasting set out to challenge NBC-owned Telemundo and Univision and tap the fast-growing Spanish-language TV market.
Pappas struck a deal with Mexican broadcaster Azteca International to create a new network, Azteca America. Azteca would provide the programming, while Pappas would provide the outlets, most notably KAZA in Los Angeles, the nation’s second biggest DMA and the largest Hispanic market.
It took only a year before the relationship soured. By 2002, it had deteriorated into dueling lawsuits. First, Azteca sued Pappas for breach of contract, attempting to force him to sell 25 percent ownership of KAZA to Azteca America.
Pappas promptly countersued, arguing that Azteca failed to provide sufficient financing to grow the Spanish-language network.
In 2003, Azteca and Pappas had worked out a settlement that enabled them to push ahead with Azteca America. Among other things, Pappas would give up control of KAZA. Azteca would operate the network flagship under a local marketing agreement. In return, Pappas would receive a $128 million loan from Azteca.
Despite their best efforts, Azteca America failed to gain traction. The cash flow Pappas and Azteca had hoped to generate from the growing market never materialized.
By early 2006, Pappas Telecasting was in financial distress and so, in March, Pappas tapped Fortress and the others for a $284 million loan. At 11.6 percent, the Azteca note wasn’t cheap.
Things went from bad to worse–and from private to public. It became apparent to all that the Azteca partnership was damaged beyond repair.
In March 2007, Pappas Telecasting announced it was considering the sale of KAZA and KAZH Houston-the two key stations in the Azteca network.
And a month later, it announced it was pulling Azteca from all its stations, except KAZA, which was then still being operated by Azteca under their 2003 agreement.
But Pappas tried to keep his dream of a Spanish-language empire alive.
In September 2007, he announced the launch of TuVision–another Spanish-language network. TuVision would be competing against not only Telemundo and Univision, but Azteca America as well.
The network debuted on stations in Houston, San Francisco, Sacramento, Reno, Omaha and Sioux City. And Pappas said Los Angeles with its big Hispanic population would joint the new network as soon as Azteca’s lease on KAZA finally came to an end in 2008.
If the shift in strategy made any sense, it was clearly too late.
In December 2007, Pappas announced that it had hired Moelis & Co. would seek buyers for the Pappas stations and that he was headed for retirement.
“After more than 40 years in the broadcast industry, the time has come to simplify my life and spend more time with my family,” he said.
He also soon retreated from his plans to add KAZA to the TuVision network. Instead, he sold a piece of the station to Azteca and cut a deal extending its lease until 2012.
Then, on May 10, 2008, Pappas Telecasting and 13 stations filed Chapter 11 bankruptcy.
Ultimately, it was the $284 million bridge loan from Fortress that brought Pappas down. Pappas and his wife, Stella, personally guaranteed $30 million of this bridge loan.
The money had been intended to keep Pappas Telecasting operating and paying loan interest and principal while it attempted to sell what Fortress characterized as certain “crown jewel” stations.
But Pappas, sources say, was asking too much for those stations, seeking 12-15 times cash flow multiples, contending the stations were in potential duopoly markets.
Because Pappas Telecasting is privately held, it isn’t required to make public financial and operational information. Only company insiders, station brokers and would-be buyers have been able to scrutinize key information. But the reaction of would-be buyers speaks volumes: Once they’d done due diligence, they stayed away in droves.
The one exception was the sale of a quarter interest in KAZA to Azteca in December 2007 for $36 million.
According to bankruptcy court documents, proceeds from that sale were to go to Fortress and other creditors to pay down bridge loan. But Pappas ponied up only $15 million, withholding at least $7 million for what Fortress described as a “personal agenda.”
“Immediately prior to the [bankruptcy filing] in May, Harry J. Pappas converted the funds–in violation of his prepetition financing documents and the Lenders’ prior interest therein–from [Pappas Telecasting’s] account to his personal account,” according to an objection to the plan Fortress submitted two days after the initial bankruptcy filing.
Pappas “is improperly seeking to loan the funds to the debtors in violation of these agreements.”
Had that financing plan been approved, Pappas would not have had to use any of his own money to fund continuing operations of his bankrupt companies and he would have earned administrative and other fees on the loan.
Fortress wasn’t buying it. And, after some consideration, neither did U.S. Bankruptcy Court Judge Peter J. Walsh.
Fortress filed an objection to Pappas’ DIP financing plan in late May and, at the same time, dropped the hammer on Pappas personally, filing to force him and his wife into involuntary Chapter 7.
Walsh split the difference: He rejected Pappas’s financing plan and allowed the personal bankruptcy to go ahead, but he wasn’t willing to force liquidation and subsequently converted it the bankruptcy to a voluntary Chapter 11.
What began as an effort to help Pappas Telecasting reorganize and pay off its heavy debt burden ended up bringing down the company’s founder.
On Sept. 10, Walsh approved a Fortress $5 million financing and set specific deadlines for the sale of stations. Under that order, Pappas Telecasting has until February 15, 2009, to sell 13 stations.
They include KMPH Fresno-Visalia, Calif. (Fox); KFRE Fresno-Visalia, Calif. (CW); KPTM Omaha, Neb. (Fox); KXVO Omaha, Neb. (CW); WCWG Greensboro-Winston-Salem-Highpoint, N.C. (CW); KPTH Sioux City, Iowa (Fox); KMEG CBS, Sioux City, Iowa (CBS); KTNC San Francisco-Oakland-San Jose, Calif. (TuVision); KAZH Houston (TuVision); KDBC El Paso, Texas (CBS); KREN Reno, Nev. (CW); KAZR Reno, Nev. (TuVision); KCWK Yakima-Pasco-Richland, Wash. (CW).
Last week, E. Roger Williams, the bankruptcy trustee, put KREN–the Reno, Nevada, station Pappas was running out of a shopping mall–under contract to Spanish-language station group Entravision Communications Corp. for $4 million. The deal also includes several low-power stations.
As is typical in certain bankruptcy cases, Entravision agreed to play the role of “straw man.”
Its $4 million offer is, in effect, a minimum bid for the station. An auction for the station is set for late October and if the property draws higher bids, Entravision would have the option to up its offer or let the station go to a higher bidder.
The approach is intended to fetch the highest price for an asset and thus aid in making creditors whole.
Under the court order, Pappas must sell 13 stations, but it appears that all the stations in the group are on the block.
Sources say Moelis & Co., the broker Pappas hired, is actively hawking the two stations in the San Francisco-Oakland market, KTNC and KUNO, with asking prices of $30 million to $40 million each.
Sale of the stations is going to be difficult at best under current market conditions.
Meanwhile, the bills keep mounting for Pappas and Pappas Telecasting. For one month alone, albeit an expensive month as it was when much of the initial filings were done, attorneys for the bankrupt entities billed $83,492.50.
Before the company or the couple can move out of the court’s jurisdiction, they must come up with court-approved reorganization plans that will allow them to emerge from bankruptcy and pay off creditors.
Most likely, the plan will involve the sale of many or all of the stations.
Another scenario is that Fortress and the other secured creditors could convert the debt into equity ownership of the company.
In any event, the Pappas story is unlikely to have a happy ending.