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Analyst Sees Hang-Ups With Hallmark Sale

3/03/2006 7:00 PM Eastern

The sale of Hallmark Channel has been held up by questions about the value of its library and concerns about its expiring carriage deals, a Wall Street analyst opined last week.

About six months ago, Crown Media Holdings Inc., which owns and operates the network, said it would explore “strategic alternatives” for the 72 million-subscriber channel. Several media giants, including News Corp. and Time Warner Inc., had expressed interest in the network, according to officials familiar with the situation.

Alan Gould, an analyst with Natexis Bleichroeder Inc., offered his take on why the sale hasn’t happened yet. “We believe the delay or diminished interest in Crown is due to questions regarding the library valuation and the ability to increase subscriber fees on the next round of affiliate agreements in 2007 [and] 2008,” he wrote in a report.

Gould has lowered his valuation of Crown’s 650-title Hallmark movie and TV library to $300 million from $400 million. As a result, he reduced his fair-value estimate of Crown stock — currently trading at about $8 — to $9 a share.

Gould also trimmed his valuation range of Hallmark Channel to just $19 to $21 per subscriber, from $19 to $23.

Hallmark’s carriage deals with three major carriers — Comcast Corp., DirecTV Inc. and Time Warner Cable — expire in late 2007 or early 2008, according to Gould.

And the network’s prospects for rate hikes aren’t good, especially in light of the example set with Lifetime Television’s bitter fight earlier this year with EchoStar Communications Corp.’s Dish Network over license-fee increases, in which the women’s channel was dropped for a month.

“As illustrated by the dispute between Lifetime and EchoStar, it appears the market power has moved even further away from the programmers and toward the distributors,” Gould wrote.

He put Hallmark Channel’s monthly per-subscriber license fee at 6 cents this year.

Crown continues to have discussions with “interested parties, and certainly is going to continue pursuing the strategic alternatives” regarding Hallmark Channel, Crown spokeswoman Mindy Tucker said.

If Crown doesn’t get bids for Hallmark Channel at the price it wants, Gould suggested management and inside shareholders might opt to buy out other shareholders. Another option for Crown is a joint-venture deal for Hallmark Channel with a strategic partner, rather than an outright sale.

Hallmark Cards Inc. owns 67% of Crown. Liberty Media Corp. and DirecTV also have small stakes.

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