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Hallmark in Play? All In the Cards

Two top minority stockholders of Crown Media Holdings are not-so-quietly putting pressure on the Hallmark Channel parent to either join the M&A fray and sell, or take the company private at a price that could give independent shareholders the payday they have been waiting for.

But with 90.1% of the company in the hands of Hallmark Cards, the Kansas Citybased greeting card giant that has kept its Crown Media hand close to the vest, the pair could be in for a very long wait.

Spencer Grimes, a former media analyst who’s now a fund manager, touched off the latest minority shareholder salvo last month, calling for the company to sell to the highest bidder or have Hallmark Cards take it private in a letter to Crown Media chairman Herb Granath.

In his letter, Grimes, who heads up Twinleaf Management LLC, a Connecticut-based investment adviser whose clients own more than 502,000 shares of Hallmark stock, warned that pay TV valuations have passed their peak and there is a real risk Crown could “miss the window” for selling the network at a premium price.

Hallmark Cards declined comment.

$5 PER SHARE?

Grimes in his letter estimated that Hallmark could attract at least $5 per share from an interested buyer. (In an interview, he said that price could rise as high as $6 per share in a spirited auction). Still, $5 per share would represent a $2 billion valuation and a 40% premium to Crown’s current price, or about 11 times Crown’s estimated 2015 cash flow of $180 million. That, he added, is down from the 12 to 14 times cash flow he believes it could have received in a sale last year.

Most analysts believe programmers could soon be lining up to take advantage of cheap debt, burgeoning stock prices and a need to quickly bulk up in the wake of Comcast’s pending $69 billion merger with Time Warner Cable and AT&T’s $67 billion acquisition of DirecTV. The latter deal could be of most concern to Crown shareholders — AT&T’s U-verse TV service has not carried Crown’s Hallmark Channel nor Hallmark Movie Channel since 2010, over what it called unreasonable affiliate-fee demands.

And while AT&T has told regulators it would carry smaller networks like RFD-TV and other rural-oriented channels if its DirecTV deal passes muster, it declined comment when asked if U-verse would carry the channel or DirecTV would drop the network after the deal is approved.

DirecTV, which currently carries both networks, has 20 million customers.

Losing DirecTV could be a major blow and would be a huge catalyst to force the independent network to seek a much larger partner.

Adding to the frustrations of Grimes and other minority investors is Hallmark’s silence concerning its plans for the company. Although it owns 90.1% of Crown Media, Hallmark has repeatedly declined requests by investors for clarity. Its last public statement on its plans for Crown Media was contained in a terse 13-D filing with the Securities and Exchange Commission on June 24, 2013, about six months after a standstill agreement expired — where it would have been required to pay minority shareholders a 50-centsper- share premium on any sale of the company — Hallmark said it was evaluating its interest in Crown Media and was considering “all alternatives available to them.”

Even Crown Media can’t get an answer. In its most recent quarterly conference call with analysts in May, executive vice president legal and business affairs and general counsel Charles Stanford responded to a frustrated shareholder, telling him that Crown has kept investors abreast of its plans regarding programming and the overall direction of the company.

“But we cant speak for our investors,” Stanford said during the May call. “Hallmark is a privately held company and they’ve prospered by keeping their plans pretty close to the vest. That’s just the way they do business.”

But that lack of clarity has minority forced some shareholders to fear the worst.

Already, longtime holders of the stock are smarting from the dilution a 2010 recapitalization plan — which increased Hallmark Cards’ stake to 90.1% — wrought. Crown shareholder Salvatore Muoio, who heads up investment fund S. Muoio & Associates, sued in Delaware Chancery Court to block the move that year but the court found in favor of Hallmark Cards.

Many minority investors fear Hallmark Cards could take Crown private via a short-form merger, which would not require full shareholder approval, at a bargain price. And given the greeting card giant’s past track record, they aren’t optimistic Hallmark Cards will have minority shareholder interests in mind.

“I’ve been through the wringer with these people,” Muoio said in an interview. “I don’t have a lot of faith in their fiduciary [duty]. I don’t really think about it that way at all.”

In the meantime, minority shareholders are sweating out the possible impact of consolidation.

According to SNL Kagan, Hallmark charges among the lowest affiliate fees of any fully distributed network — about 7 cents per month per subscriber. Hallmark Movie Channel, currently available in about 53.5 million homes, charges about 2 cents, according to Kagan.

“[O]ur company seems likely to be squeezed in coming years in both segments of core revenue generation, distributor fees and advertising sales,” Grimes wrote. “Therefore, the case for remaining an independent, sub-scale, publicly traded company is severely flawed.”

SELLING HIGH

Another big factor in selling the network is that Hallmark Channel has been performing better than it has in years. The stock is up nearly 50% in the past 12 months (from $2.47 per share to $3.63 per share) and cash flow has more than doubled since 2008, when the company first posted positive earnings before interest, taxes, depreciation and amortization, from $66.2 million to $160 million in 2013. Ratings at the Hallmark Channel, which mostly offers female-oriented off -network series such as The Golden Girls and movies with holiday themes such as Matchmaker Santa, also are up.

Average daily viewers for Hallmark Channel have risen about 20% in the past 12 months to about 868,000. At the Hallmark Movie Channel, which is only available in about 53 million homes, the primetime audience is up about 22% to 275,000 viewers.

“Management is doing a good job,” Muoio said.

While Grimes is confident a buyer could be found — Time Warner Inc.’s Turner Broadcasting System, Tribune Co., Viacom and CBS have all been cited as possible suitors — the company has been down this road before and it was a dismal failure. In 2005, then-CEO David Evans hung out the “For Sale” sign, hoping to attract at least $2 billion. After nine months with no firm offers, the company was taken off the auction block.

Some analysts wonder if history won’t repeat itself.

“It’s hard to say,” said Pivotal Research Group media analyst Brian Wieser — who does not follow Crown — concerning whether it could be attractive to larger programmers. “I would guess at the right price, anything is interesting. But it’s not as if Hallmark offers any meaningful strategic advantage to any of them.”