Crown Cancels Plans for Sale, Shifts View to Problem Solving

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Like a Southland homeowner who’s concluded his chance to cash in at the height of the real estate boom has passed, Crown Media Holdings Inc. last week decided to take down its “For Sale” sign and instead focus on building equity.


After eight months of reviewing strategic alternatives, Studio City-based Crown Media said it will continue running its Hallmark Channel cable television and movie networks plus its video-on-demand and high-definition programming services. The company also plans to cut costs, refinance its debt and negotiate

better deals with distributors as part of an effort to become profitable.


The company is 67 percent owned by Kansas City, Mo.-based Hallmark Cards Inc., which Crown said supported its move not to sell the company and will extend its trademark license deal with Crown Media.


Even so, Crown’s stock fell to its lowest level in two years after the April 17 announcement, dropping 17 percent to $4.78. Shares closed at $4.89 on April 19. Shares are down 44 percent over the past year.


Analyst Alan Gould at Natexis Bleichroeder Inc., which doesn’t rate the stock, lowered his fair market value of the company to $7.80 a share from $8.70, citing the challenges the company faces in improving its financial structure without a sale.


Crown, which was spun off from Hallmark in 2001, bought the channel in 1998 then running family programming as the Odyssey Channel seeing it as an outlet for its own respected library of sponsored television specials and other family programming it had purchased.


But despite owning a respected Top 10 network and a 700-title library of classics ranging from the “Roots” miniseries to the “Touched by an Angel” and “M*A*S*H” television shows, Crown Media was unable to find a buyer willing to offer what executives thought the company was worth. Several potential buyers kicked the tires but none went beyond that. Likely part of the problem: it’s a money loser and weighed down in debt.


The company reported a net loss of $233 million, or $2.22 a share, in 2005, down from $317 million, or $3.03, in 2004. At the end of the fiscal year it also reported debt of just under $1 billion and only around $16 million in cash and cash equivalents. Much of Crown Media’s debt is owed to a Hallmark Cards subsidiary as part of a credit agreement of sorts that has covered the channel’s ongoing losses.



Upside view


In a conference call with analysts, Chief Executive David Evans said he is looking for a buyer for the movie catalog to help pay down debt. And Chief Financial Officer William Aliber said the company is negotiating an extension of its debt arrangement with a lending group led by JPMorgan.


Still, when announcing last August that the company had hired Citigroup Inc. to look at its options and vet suitors, Evans stressed the upside that any investor group would be buying into a property with high growth potential.


Back in 2001, News Corp. sold Fox Family Channel to Walt Disney Co. for $3 billion. And in February 2005, Crown sold the international division of the Hallmark Channel for $242 million to a private equity group. Some analysts value the Hallmark Channel at around $1.5 billion, with the library at $300 million to $400 million.


And based on the number of households that receive the channel as part of a cable program tier, the Hallmark Channel had approximately 71.4 million subscribers as of Feb. 28, with the 2-year-old Hallmark Movie Channel having approximately 500,000 subscribers at the end of last year.


But there are other problems, and chief among them is the belief these days that general entertainment channels aren’t valued as highly as niche products. Moreover, both Hallmark channels tend to skew older in viewership than the 18-34 years demographic advertisers value most. Potential buyers also may have been put off by less-than-lucrative contracts with cable companies. Even on an operating basis, the channel lost $1.9 million last year.


“Today the company sits with little to no cash flow and a significant degree of leverage that has investors worried,” said Jeffries & Co. Inc. analyst Robert Routh in an investors note. “We believe that if the company reinforces the support of Hallmark Cards … the stock can move appreciably higher.”

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