Economy, Suit Stall Crown Media Deal

10/03/2009 2:00 AM Eastern

Crown Media Holdings, parent of Hallmark Channel, has gotten a little breathing room in deciding whether to accept a restructuring proposal from its largest debtor, due in part to a resurgent economy and a shareholder's lawsuit.

Back in late May, Crown Media was notified by its largest debtor — Hallmark Cards — of a plan that would halve its $1.1 billion in debt to $500 million, in return for most of the company's equity. Hallmark currently owns about 70% of Crown's equity and 85% of its voting shares through various entities. While Hallmark characterized that proposal as a way for Crown to get rid of a large chunk of debt, others saw it as a ploy to dilute other shareholders. On July 13, one of those shareholders — Salvatore Muoio, managing director of S. Muoio & Co., which owns about 5.2% of Crown shares — sued in federal court to block the deal.

Originally, Hallmark had said it wanted an answer from Crown on whether to accept or reject the deal by the time it filed its second quarter 10-Q statement with the Securities and Exchange Commission. That document was filed Aug. 6, but there still has been no decision from Crown. Hallmark later said that it had not intended the request to be a deadline.

Muoio said that it is likely his suit had some influence on that decision — his suit has stated that Crown wouldn't have time to properly evaluate the proposal if that “deadline” was met.

“I guess the Hall family [which controls Hallmark Cards] has told them there is no pressure, they can take as much time as they need, which I think was a response to our case,” Muoio said.

Crown formed a special committee of independent directors shortly after the proposal was made — including former Kansas City Power & Light CEO A. Drue Jennings, ESPN chairman emeritus Herb Granath and former CBS CEO Peter Lund — to evaluate the offer.

Crown Media spokeswoman Nancy Carr declined comment. Hallmark Cards spokeswoman Julie O'Dell also declined comment.

Muoio said that his case is ongoing.

“The ball is in their court,” Muoio said.

Since Hallmark Cards made its proposal in May, credit markets that were shut tight in the early part of the year have begun to loosen. August and September alone were characterized by big deals from Viacom ($1.3 billion), Discovery Communications ($500 million), Dish Network ($1.4 billion), Cablevision Systems ($900 million) and DirecTV ($2 billion).

“Since they made this proposal, look what has happened to the credit markets and the equity markets,” Muoio said. “It seems like every day, you hear of three new debt offerings and now you're seeing a big equity offering every day. Maybe there are other options.”

With credit markets on the mend and Crown reporting healthier revenue and cash flow — it reported its first year of positive cash flow in 2008 ($66.2 million) and cash flow for the first half of 2009 was $39.9 million, outpacing the prior year — could mean that other credit options are open to the channel.

In addition, the flurry of recent debt deals have caused some observers to wonder if some of the bigger players in the space are neatening up their balance sheets for future acquisitions, possibly including Hallmark.

Several cable players — including Comcast, Viacom, Time Warner Inc. and Scripps Interactive Networks — have said recently that they would consider purchasing cable-network assets at the right price.

Muoio believes that Crown would be an excellent fit with another cable network.

“They're a general entertainment network. They would fit better with a producer of programming,” Muoio said.

Hallmark Channel

  2004 2005 2006 2007 2008
$ in millions
SOURCE: Company reports
Long-term debt$886.3$971.6$975$1,004$1,100
Adjusted EBITDA-$0.056-$1.4-$12.6-$11.3$66.2
Interest Expense$66.9$73.9$98.7108.1$100.2
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