Oppenheimer Initiates Coverage on Hallmark Channel Parent

6/28/2007 7:30 AM Eastern

Saying that Hallmark Channel is in the midst of a turnaround, Oppenheimer initiated coverage of the network’s parent company and issued a buy rating on its stock.

In a report Wednesday, analyst Thomas Eagan noted that Crown Media Holdings is in the process of negotiating contract renewals for more than one-half of the subscriber base of its network, Hallmark Channel.

“We anticipate that the renegotiated affiliate fees could exceed our estimates and provide significant upside to our forecasts,” Eagan wrote. “Greater upside could come from a sale of the Hallmark Channel.”

Crown Media put the network on the block in 2005, then withdrew it. “With a turnaround nearly at hand, we believe a sale would be easier this time,” Eagan wrote.

Hallmark is negotiating distribution renewals with its key affiliates. It already struck a deal with EchoStar Communications, which Eagan noted added 6 million households to the network’s base.

Renegotiation of contracts with Comcast, Time Warner Cable and DirecTV, totaling 50 million subscribers, “could translate to affiliate rates increasing from $0.034 in 2007 to $0.04 in 2008, enabling a 29% growth in subscription revenue,” Eagan wrote, calling his numbers “admittedly conservative estimates.”

Crown could negotiate better rates, he noted.

“There is, of course, the prospect for Crown’s affiliate fee to decline with these upcoming negotiations,” Eagan wrote, or for it to lose carriage. “But we believe the risk is low,” he added.

“It is also possible that Comcast and Time Warner Cable keep their affiliate fees flat with the 2007 level, but deepen [Hallmark Channel] penetration into their subscriber bases,” Eagan wrote. “The HC is distributed on approximately 80% of Comcast’s 26 million subscribers and roughly 82% of Time Warner cable’s 17 million subscribers.”

Eagan also credited Crown Media’s new CEO, former Court TV CEO Henry Schleiff, with reinvigorating Hallmark Channel’s “strategy to position itself as a family-oriented refuge from today’s sex- and violence-heightened broadcast and cable programming.”

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