Hallmark Channel Parent Investors See Bad Deal in Cards

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Soon after airing its final Christmas movie of the year, Hallmark Channel’s parent company, Crown Media Holdings of Studio City, could be taken private. And some investors are worried they won’t be getting a feel-good ending.

After Dec. 31, Crown’s 90 percent owner, greeting card giant Hallmark Cards of Kansas City, Mo., will be allowed to increase its stake or sell its shares for the first time in years because restrictions are expiring. In a June filing with the Securities and Exchange Commission, Hallmark Cards said that after the first of the year, it might take Crown private or sell its stake. JPMorgan credit research analyst Michael Pace later wrote that the take-private option is the most likely scenario.

Now, some minority shareholders are worried their shares could soon be bought by Hallmark Cards at a price below what another media company would pay and that they won’t be getting much say in the matter. Shareholder Lawrence Stern wrote a note detailing his concern to Crown’s board earlier this month.

“My financial concern centers on the inability of management and the board to maximize the value of the enterprise for all owners of this business,” he wrote in the note, which he provided to the Business Journal.

Crown owns the Hallmark Channel, known for family-friendly fare such as the new series “Cedar Cove,” about a small-town judge played by Andie MacDowell, as well as the Hallmark Movie Channel. The channels are carried by cable companies and reach 87 million and 52 million homes, respectively. The Hallmark name is licensed from Hallmark Cards.

Stern owns his shares through family investment fund Stern Family Partners in New York. He wrote in the note that the fund owns more shares than all but one of Crown’s top management and board members combined, although he would not say exactly how much the fund owns. Top Crown executives and board members, excluding majority shareholder Donald Hall Jr., own just .03 percent of the company, according to an April proxy statement. Chief Executive William Abbot owns 4,000 of the 34.7 million shares not owned by Hallmark Cards.

Stern believes management and the board have overlooked easy opportunities to maximize the company’s value, including regaining carriage on the AT&T U-Verse service (carriage was lost in a 2010 dispute) as well as refinancing $300 million of debt. Lower profit could justify a lower buyout price.

“Crown management appears to have intentionally suppressed current earnings potential for the business, thus reducing the price that the majority owner might be forced to pay,” he wrote in the note.

Spokeswomen for Hallmark Cards and Crown said the companies would not comment.

Crown’s shares closed the week ended Dec. 18 at $3.38. At that price, Hallmark Cards would need to pay about $117 million to buy the minority shares and take Crown private. Hallmark Cards is a private company.

Recap redux

It isn’t the first time that minority shareholders have been unhappy with Hallmark Cards.

Former 6 percent shareholder S. Muoio & Co., a New York investment firm, tried to block a major recapitalization plan put forward by Hallmark Cards in 2009, claiming the deal undervalued Crown and diluted minority shareholders. The deal went through the next year and is credited for helping Crown avoid a bankruptcy filing.

The recapitalization swapped $1.2 billion of Hallmark Cards debt for equity and increased the greeting card company’s stake to 90 percent from 67 percent. (Hallmark Cards owns shares through various subsidiaries. Hall is listed in SEC filings as the largest individual owner of Crown shares.)

The deal came with a set of conditions that will expire at the end of the year. One of those was a 50 cent premium on shares that Hallmark Cards would have had to pay in order to buy out minority shareholders. Expiration of that premium would save Hallmark Cards $17.4 million in a take-private deal.

Paul Hodgson, a partner at corporate governance and research firm BHJ Partners in Portland, Maine, said undervaluing the company would not be in the best interest of Hallmark Cards.

“They have to put a value on the company that is sensible. Otherwise, the SEC will review the deal and say no,” he said.

Of course, there’s always the chance that after the first of the year, Hallmark Cards will maintain status quo at Crown or possibly sell to another media company.

But if Hallmark Cards does decide to buy up the remainder of the stock, shareholders would be more or less forced to accept any offer no matter the price; otherwise, they’d end up holding illiquid shares.

Some shareholders favor a sale. One of those is Spencer Grimes, portfolio manager at Twinleaf Management in New Canaan, Conn., which owns 350,000 Crown shares.

But he’s hoping for an open auction that attracts big names such as CBS Corp. or 21st Century Fox. The idea would be to sell soon to take advantage of rich valuations for other recently sold cable properties, such as the parent company of the Outdoor Channel, which sold after a prolonged bidding war for a 36 percent premium to its stock price.

Grimes said that he believes that Crown could disclose plans for a sale or buyout in its next earnings report, scheduled for February.

He said that a company already in the business of operating cable networks would pay a premium to take advantage of cost efficiencies. In that kind of auction, Crown could go for $5 a share.

“Is it the sexiest programming out there? No. But I think a new operator with related assets can squeeze a lot of value out of it,” he said.