Hallmark Tries New Crown Offer

Hallmark Cards is greeting Crown Media Holdings with a new recapitalization plan that would give the greeting-card giant 90% of the programmer's stock, a variation on an earlier plan some holders said would dilute them too severely by leaving all other holders with just 5% of equity.

Hallmark is the largest debt and equity holder in Crown, the parent company of Hallmark Channel.

A 13-D filing with the Securities and Exchange Commission on Feb. 10 outlined the terms of the Hallmark Cards offer, issued to Crown's board (which would have to approve the deal) on Feb. 9.

Last May, Hallmark Cards offered to retire $1.1 billion in Crown debt that Hallmark Cards is owed this May in return for a $500 million loan and $550 million in equity.

Hallmark Cards had previously kept extending the debt when Crown couldn't pay. But Crown shares came under pressure last year over concerns about the debt, as credit markets tightened. Hallmark felt that pressure, too, because it owns about 70% of Crown's stock.

So Hallmark Cards said it would hold Crown to a May 1, 2010, deadline to pay the $1.1 billion, and said Crown was not in a position to pay.

That hard stance came as a surprise, as Hallmark had extended a “standstill” agreement just three weeks before and Crown was coming off one of its best years ever.

Crown posted positive cash flow for the first time ever in 2008 (about $66 million) and was on track for an even better 2009. For the first nine months of 2009, Crown had positive cash flow of $56.2 million and was on pace to beat the 2008 mark handily.

Crown last year formed a special committee of independent directors to evaluate the first offer, but then the offer appeared to fall by the wayside as credit markets began to perk up.

Crown has to refinance the debt in some way. Even with an expected uptick in cash flow, it still appears unlikely to have the $1.1 billion it owes Hallmark Cards by May 1.

Sweeteners to the offer this time around come in the form of a higher valuation of Crown, a longer payback time for about $315 million of the debt and less dilution to the other holders. Instead of 95% of equity, Hallmark Cards would end up with 90.1%.

Hallmark proposes two loan tranches, one for $200 million and a second for $115 million, as well as $185 million in convertible preferred stock.

The rest of the debt (about $550 million) would be converted into Crown common stock.

While in the May 2009 proposal Hallmark proposed extending $500 million in debt for a year (to Sept. 30, 2011), the new deal extends that debt to 2013. (See other debt terms in related chart.)

According to the filing, the new deal values Crown stock at around $2.60 per share, more than double the $1 valuation Hallmark Cards applied last May.

Crown closed at $1.56 on Feb. 10, up 4 cents.

Crown Media spokeswoman Nancy Carr referred all comment to Hallmark Cards, which also declined to comment on the filing.

Last year's proposal was opposed by Crown shareholder Salvatore Muoio, principal at S. Muoio & Co. He sued in Delaware Chancery Court last July to block the deal, claiming the transaction would severely dilute him and other Crown investors.

Muoio declined to comment last Wednesday, saying that case was still pending.

Hallmark Cards has proposed a recapitalization of Crown Media, which would give Hallmark 90% control of Crown's common stock. Some details: