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.