Big Hallmark Moment: Dec. 31, 2007

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Hallmark Channel’s deals with eight major distributors, accounting for roughly 83% of its carriage, will expire by the end of 2007, the network’s parent reported Wednesday.

That situation creates a challenge for Crown Media Holdings Inc., which also said it is continuing to explore “strategic alternatives” for the channel.

During a conference call on its fourth-quarter earnings, Crown president David Evans said the company is continuing to meet with potential buyers for the network, as well as exploring options with strategic partners relating to its film library and the overall company’s capital structure.

But Crown also revealed in its 10-K filing, filed Wednesday, that Hallmark has more than a half-dozen affiliation deals that will expire on or before Dec. 31, 2007.

“If we are unable to renew these distribution agreements, we could lose substantial numbers of subscribers,” Crown said in its securities filing. “Although we believe we will be able to negotiate new agreements on favorable terms, it is difficult to predict what the level of subscriber fees will be or whether the distributors will request marketing or ‘launch’ support payments as a condition for renewal.”

Evans told Wall Street analysts that the company had hired an investment bank to help it contact potential buyers and strategic partners.

“We do not know at this point at this time what type of transaction, if any, may result from this process,” he said on the call.

“We continue to meet with potential interested parties and explore options, which could include financial partners monetizing the film library and transactions that would adjust and improve the capital structure of Crown Media,” he said.

Evans added that he could not give a definitive timetable for this process, which started in August when Crown said it was going to pursue strategic alternatives for Hallmark.

The network is now in 72.5 million homes, and it appears to done paying out the cash launch fees it has been shelling out to secure carriage.

Last year, Hallmark has a proposal on the table with EchoStar Communications Corp. in which it would have paid the satellite provider $4 per subscriber for carriage, Evans said.

But since the network has become big enough to attract advertisers as it is, it pulled that proposal back from EchoStar, according to Evans.

“I would not anticipate that the company would be spending big to gain subscribers,” Evans said.

In the fourth quarter, Crown paid $9 million in subscriber-acquisition fees, versus $7.7 million in the prior-year period.

For the fourth quarter of last year, Crown reported revenue of $60.5 million, a 39% increase from $43.6 million in the year-ago quarter. The net loss for the quarter was $59.8 million, or 57 cents per share, compared with $129 million ($1.23) in the fourth quarter of 2004.

Subscriber-fee revenue jumped 108%, to $5.4 million from $2.6 million, due to not only new subscribers, but because free-carriage periods that some distributors had enjoyed had expired. Ad revenue kicked up 28% to $40.6 million from $31.6 million.

Crown reported revenue of $197.4 million for the year, an increase of 43% from $138.2 million in 2004. The net loss for the year totaled $232.8 million, or $2.22 per share, compared with $316.8 million ($3.03) in the prior year.

For the full year, subscriber fees were $18.7 million, nearly double 2004’s $9.9 million, while ad revenue kicked up 36% to $146.1 million from $106.3 million the previous year.

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