Investor Trashes Crown Plan

By Mike Farrell -- Multichannel News, 3/8/2010 8:38:00 AM

S. Muoio & Co. principal Salvatore Muoio has ended his silence regarding Crown Media’s controversial recapitalization plan.

He definitely doesn’t like what he sees.

Muoio, who had sued Crown in July to block an earlier version of the recapitalization, had agreed to set aside his suit as Crown’s special committee of independent directors worked out a compromise.

He broke his silence on March 2 after Crown and parent Hallmark Cards announced a plan that would reduce its overall debt from about $1.1 billion to $315 million but would increase Hallmark Cards’ equity interest in the company from about 80% to 90.1%. In the meantime, the deal would dilute Crown’s minority shareholders from 10.7% of the company’s outstanding shares to about 3%.

S. Muoio & Co. currently owns about 5.7% of Crown stock, or 4.2 million shares.

In a letter to Crown’s special committee filed with the Securities and Exchange Commission March 2, Muoio said he will likely restart his lawsuit.

“We strongly urge the special committee to reconsider before proceeding to execute definitive documentation,” Muoio wrote. “Be advised that, if the company or special committee proceeds to execute definitive documentation of the proposed transaction, we intend to pursue the litigation.”

While the new deal (see chart) off ers slightly better loan terms (lower interest rates and longer terms), Muoio stated that dividend payments and payment-in-kind provisions of the convertible portions actually make it worse for shareholders.

Although the deal values Crown at about $2.60 per share (up from the $1 per share of the old deal and the current stock price of about $1.73 per share), Muoio claims it still undervalues Crown.

Muoio believes the deal is particularly unfair to shareholders that have stuck with the company during the hard times, only to be pushed aside when their patience was beginning to show signs of paying off . He noted in his letter that Hallmark Channel went through eight years of heavy investment and losses of as much as $170 million annually, finally reaching positive cash flow ($66 million) in 2008. Now, Muoio said, the channel is ready to see profits surge.

Hallmark Cards declined to comment.