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Hallmark Could Draw Suitors

8/19/2005 8:00 PM Eastern

Now on the block, Hallmark Channel is a billion-dollar baby that would fit nicely into many media conglomerates’ cable portfolios, Wall Street analysts said last Friday.

“It’s an easy sale,” said Robert Routh, an analyst with Jeffries & Co. “The question is what the price is going to be and how it’s going to be structured. It’s noncontroversial programming. It’s fully distributed. It’s analog. They’re in top-10 total-day household ratings.”

Wall Street sees a laundry list of media companies as potential buyers for Hallmark Channel, one of the few remaining independent cable networks. They include Comcast Corp., The Walt Disney Co., Viacom Inc., NBC Universal, Liberty Media Corp. and E.W. Scripps Co.

CROWN’S 'EXPLORING’

Crown Media Holdings Inc., which operates the 69-million-subscriber Hallmark Channel, said last week it was exploring “strategic alternatives” for the company, including an outright sale. Hallmark Cards Inc. owns 67% of Crown and Liberty Media Corp. also has a small investment in the company.

Crown, which sold its international operations last year, also said that it would consider licensing the Hallmark name if a potential buyer made that request.

Routh valued Hallmark Channel’s subscribers at $24 each, while Alan Gould, an analyst with Natexis Bleichroeder Inc. pegs them at $18 to $22 apiece. That puts the network’s value at roughly from $1.3 billion to $1.6 billion, with its library valued at $450 million. The company also has $886 million in debt.

Crown Media also has a second cable network, Hallmark Movie Channel, but analysts didn’t assign it any value.

Crown officials said they were throwing in the towel because it is too difficult to continue operating as an independent cable network, without the backing of a major media company.

“After considering various factors, including the strong performance of the Hallmark Channel and the prevailing current economic realities of being a one-channel business in our industry, the board unanimously determined that now is the time to look at all alternatives,” Crown Media CEO David Evans said in a statement.

Gould noted that even though Hallmark Channel, a general-entertainment service, has been performing remarkably well, as a standalone it still isn’t generating any cash flow.

“That’s the problem with Hallmark,” he said. “They’ve done a great job gaining subscribers. They’ll be at 72 million subs at the end of this year, which puts them right below the fully distributed networks. … They’ve done pretty darned well with the ratings.

“No one’s ever going to get in trouble putting a Hallmark Channel show on the air. It’s certainly politically correct. The only problem is the cost of the programming and the cost of subscriber-acquisition.”

If Hallmark Channel was acquired by a large media company that already owns cable networks, with centralized affiliate-sales and ad-sales forces, Hallmark would benefit from the operating cost reductions, according to Gould.

“We think there’d be $30 million in ongoing synergies a year if they were bought by a larger company,” he said.

LACKS LEVERAGE

As an independent, Hallmark Channel also suffers because it doesn’t have any leverage when it negotiates carriage deals with distributors, Gould said.

Any potential buyer would have to be mindful of not changing Hallmark Channel’s programming format, or MSOs could bring up that issue and claim it would violate their carriage deals.

In July, Hallmark Channel posted a 1.1 primetime rating, up from a 1.0 a year ago, according to a Disney ABC Cable Networks analysis of Nielsen Media Research data.