Five key affiliate stations say they will stop carrying Azteca America’s signal, dealing a significant blow to the L.A.-based Spanish-language network’s bid to crack the U.S. market.

Azteca is a wholly owned subsidiary of TV Azteca, the No. 2 broadcaster in Mexico. The company established its U.S. headquarters in Century City only last May, commemorated by an official welcome from City Council President Eric Garcetti and a Cinco de Mayo celebration at the Skirball Center.

The decision also comes at a critical time before the “upfront season” when advertisers size up next fall’s TV shows and decide upon their ad spending.

“The move comes as no surprise, although we don’t exactly understand the logic involved,” said Luis Echarte, chairman of Azteca America. “We are confident that we will be able to maintain or improve coverage with agreements that are in negotiation.”

Pappas Telecasting Cos. in Visalia owns all five stations, located in Houston, San Francisco, Sacramento, Reno, and Sioux City, Iowa. The decision takes effect on June 30. The Azteca network has outlets in 55 U.S. markets, but according to Pappas nearly two-thirds of Azteca’s primetime audience come from just three Pappas stations.

Azteca perpetually runs behind rival Univision Communications Inc., the L.A.-based behemoth of U.S. Spanish media, and Telemundo, a subsidiary of NBC Universal. But for now one crucial Pappas station remains in the network: KAZA-TV (Channel 54) in Corona covers the Los Angeles market, the largest in the nation for Spanish-language advertising. Thanks to a special operating agreement, the station should keep its Azteca identity until July 2008.

For the other Pappas stations, the marriage to Azteca lasted about six years. “Azteca America network’s programming has not developed and ratings have not grown as we had expected,” said Chief Executive Officer Henry Pappas. “We are choosing amongst various other options for programming on these stations.”

Based on the experience of the Fox, WB and CW networks in English, as well as Univision’s Telefutura network launch in Spanish, Pappas said programming strategies can be evaluated within two to three years. Azteca’s programming has scored some successes with “La Academia,” an “American Idol”-like show, the telenovelas “Cuando Seas Mia” and the Brazilian import “Xica,” and Mexican soccer matches.

“In fairness, there has been content which has performed credibly. And particularly on our stations, with that kind of content, we were fully competitive with Univision and Telemundo,” said Pappas. “What we haven’t seen is the whole of Azteca America’s program schedule develop as it should in order for us to justify continuing affiliation. By this time, a network should be fairly viable in all key day parts, particularly in primetime. And all through prime not just one hour.”

However, according to Azteca, Pappas stations only account for about 9 percent of Hispanic households nationwide. The network said it plans to select better affiliate partners that can promote and sell Azteca programs, especially in the large Houston and San Francisco markets.

As for the poor performance, “we disagree with the reasons stated by Pappas. Stations of strong operators, who are investing in local programming and promotions to complement our network feed, are growing nicely,” said Echarte. “For instance, in Las Vegas, our affiliate beat out Telemundo in key day parts in the November sweeps. Our station in Los Angeles also beats Telemundo in key day parts. With new station owners, we look forward to being able to coordinate marketing and promotions more closely than with the Pappas administration.”

Trouble foreshadowed

As a foreign company, TV Azteca cannot own U.S. broadcast stations, so on paper the Pappas arrangement looked good for both sides. But a parting of the ways was foreshadowed as far back as 2003, when the partners negotiated an affiliation agreement that allowed either side to terminate the agreement at six month intervals.

Jon Currie, president of the TV consulting firm Currie Communications in Pacific Palisades, said a twice-a-year escape clause is extremely unusual in affiliation contracts, which normally run for several years. Currie has worked for both Pappas and TV Azteca in Mexico.

Azteca acknowledged the unusual arrangement in a statement. “Because of the nature of this agreement, Azteca America has always been ready with alternative coverage solutions. The company expects to execute these options shortly to offer viewers uninterrupted service,” according the statement.

Pappas signaled its intent last month, when it announced it had retained Media Venture Partners LLC, a consulting firm, to help assess “strategic options” for its Hispanic market strategy. The options include joint ventures, sale of the Houston and Los Angeles stations, or a strategic alliance with Spanish-language program suppliers or equity investors.

While it might seem obvious that Pappas will drop the other boot on KAZA next year, Echarte raises one caveat.

As part of the KAZA deal, Azteca extended a loan to Pappas for $132 million. The loan comes due when Pappas terminates the affiliation agreement.

Echarte wouldn’t discuss future programming plans at stations for strategic reasons, but added that “with $132 million in hand, horizons are expanded quickly.”

Pappas said that if he does nothing, the KAZA deal expires in July 2008, at which point he must repay the loan and “we’re prepared to do that.”

But first, he needs programming for five stations. Currie the consultant said Pappas could look for other network affiliations, especially in the smaller markets with few stations. Other options include going with infomercials or turning the stations independent and scheduling syndicated shows and local news.

“He’s a good businessman, so maybe the math wasn’t there. But I don’t bet against that guy (Pappas),” Currie said.

Pappas indicated the stations were open to a variety of options. “We’re available to talk with parties, either content providers or strategic partners or yes, an outright purchaser. We have had all of the above contact our advisors in the last couple of weeks, and the pace accelerated after our announcement of terminating the affiliation,” said Pappas.

Currie thinks Azteca should tell the upfront audience the lost stations will be replaced with better ones, so the switch will improve the network for everyone. And, indeed, that’s exactly the message the company has emphasized.

Adrian Steckel, president of Azteca America, promised that “these short-term issues will be resolved and we will maintain our coverage and standing as a network. We look forward to our next press release when we can announce the beginning of those long-term affiliations for July 1.”

“We look forward to entering our upfront 2007 stronger than ever and we are investing more heavily in programming options specifically geared to the U.S. market to complement the strong programming that comes from Mexico,” said Echarte. “We are also presenting for the upfronts a truly U.S.-based organization based in Century City that is proud of its Mexican roots.”