Analysts Encourage Hallmark Moment


Now on the block, Hallmark Channel is a $1 billion baby that would fit in nicely with many media conglomerate’s cable portfolios, Wall Street analysts said Friday.

“It’s an easy sale,” said Robert Routh, an analyst with Jeffries & Co. Inc. “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.”

There’s a long laundry list of media companies that Wall Street sees as potential buyers for Hallmark, one of the few remaining independent cable networks. That list includes Comcast Corp., The Walt Disney Co., Viacom Inc., NBC Universal, Liberty Media Corp. and even E.W. Scripps Co.

Crown Media Holdings Inc., which operates the 69 million-subscriber service, said Thursday that it was exploring “strategic alternatives” for the company, including an outright sale. Crown is 67%-owned by Hallmark Cards Inc., with Liberty also having a small investment in the company.

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

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

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

Basically, 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 CEO David Evans said in a prepared statement.

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

“That’s the problem with Hallmark,” he added. “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 was acquired by a large media company that already owns cable networks, with centralized affiliate and ad-sales forces, it would benefit and see 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 added.

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

“It was one of these situations where quarter after quarter, you’d see the subscriber growth, you’d see the ratings improvement, you’d see the ad revenue coming in and you’d end up seeing the debt increase,” he added. “The economics just didn’t make sense to be a stand-alone network.”

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

In July, the network 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.