Crown Media Holdings, Inc. (CRWN) owns and operates Hallmark Channel and Hallmark Movie Channel, pay TV networks in the United States. The company underwent a controversial debt-to-equity recapitalization in 2010 that crammed equity holders down to a 9.7% ownership stake while the debt holder, Hallmark Cards Inc., converted into a 90.3% controlling position.
In our letter to the company's board below, we believe that while its operating performance has improved recently, it is becoming disadvantaged in the marketplace by its independence. We are urging the company's board to pursue a sale of the company to capitalize on what we believe are peak valuation multiples for pay TV programming networks, especially those without an international presence. Based on recent and historical comparable transactions, we believe a sale of CRWN to a larger industry player could yield $1.8 billion to $2 billion (including debt), or nearly $4 per CRWN share.
We believe that there would be no shortage of interested buyers: CBS, Disney, News Corporation, Discovery Networks, possibly even NBCU and Sony and that a strategic buyer could remove an astounding amount of expenses (perhaps north of $80 million annually) from CRWN's cost structure while simultaneously boosting ad sales and affiliate fee revenue.
Our letter to CRWN's board is below. Given the small size of our position in CRWN and that of that of the controlling shareholder, we don't expect a thoughtful response. Thus the decision to post it here:
September 25, 2012
Board of Directors
Crown Media Holdings, Inc.
12700 Ventura Boulevard
Studio City, CA 91604
Mr. Herbert Granath, Co-Chair
Mr. Donald J. Hall Jr., Co-Chair
Mr. William Abbott
Mr. Dwight C. Arn
Mr. Robert Bloss
Mr. William Cella
Mr. Glenn Curtis
Mr. Steve Doyal
Mr. Brian E. Gardner
Mr. Irvine O. Hockaday
Mr. A. Drue Jennings
Mr. Peter A. Lund
Mr. Brad R. Moore
Ms. Deanne R. Stedem
Dear Sirs and Madam:
Twinleaf Management LLC (“Twinleaf”) is an investment advisor to client accounts that own approximately XXX,000 shares of Crown Media (“CRWN” or “the Company”) common stock. While CRWN shares have risen in recent months, multi-year shareholder returns are abysmal. Accordingly, we urge the board to pursue a sale of the Company now.
The following data and analysis strongly support our conclusion:
• Disney and Hearst recently paid $3.1 billion for NBCUniversal’s 15.8% stake in A&E Networks, a pay TV programming peer of the Company. We believe this to be a valuation multiple of 16x 2012 EBITDA, well above the Company’s 7x trading multiple.
• In recent comments at an investor conference, the CEO of CBS, Les Moonves, indicated a willingness to own more cable programming assets. With its superb track record in broadcast and its slim cable profile, CBS is a very logical prospective buyer of the Company.
• The pay TV industry is mature in the US, the Company’s sole operating territory. Forecasts are for further anemic subscriber and affiliate fee revenue growth for the industry and CRWN. Competitive inroads from over-the-top (OTT) services like Netflix and Hulu, combined with economic pressures on American families, clearly indicate that multichannel video is no longer a growth industry.
• The Company’s advertising sales performance is adequate but we believe that ad sales growth will be increasingly difficult to achieve. Technological advancements and shifting consumer behavior are driving unprecedented levels of television advertising avoidance and we do not believe that advertisers will blindly and forever support a marketing vehicle in absolute decline. Cord-cutting means fewer subscribing households and declining ad impressions driven by OTT viewing and DVR ad-skipping suggest that the fundamentals supporting CRWN’s value are in the early stages of erosion.
• The Company owns relatively little of its programming lineup and has certain restrictions on international expansion, limitations that overexpose the Company to slow-growth conventional domestic distribution (cable and satellite) and limit promising ancillary revenue opportunities such as program sales to OTT providers.
• The Company’s networks are among the few widely distributed ones that do not benefit from scale economics conferred by media conglomerate ownership, including marketing, promotion, advertising and affiliate sales across multiple networks, creative and executive talent crossover and corporate and back-office efficiencies. As such, CRWN routinely lags its peers in key performance metrics.
• The pay TV economic model is strained and carriage feuds between pay TV distributors and programmers are growing more frequent and fierce. Rising programming costs are acutely pressuring distributors. As an independent company that lacks negotiating leverage and the resources that multiple networks and a strong parent company can bring, CRWN will be increasingly poorly positioned. Attempts to boost affiliate fees or, worse, maintain carriage with certain distributors will continue to be challenging. For evidence of this, look no further than the Company’s own disastrous 2010 dispute with AT&T’s U-verse that has cost the Hallmark channels 4 million subscribers and the Company millions of dollars of high-margin revenue during the ongoing U-verse blackout.
We also have governance-related concerns about the Company. We question the need for a company with a 90.3%-controlling shareholder to have 14 directors on the board at shareholder expense. May we suggest that the Company make due with half as many directors and apply the estimated $1 million in cost savings to better use? And to better align the interests of directors and shareholders, how about reforming director compensation by awarding CRWN shares rather than cash since it appears that very few of the current directors wish to invest their own cash in shares?
In short, we believe that no industrial logic supports the continuation of CRWN as an independent company (or, technically, an affiliate of Hallmark Cards, Inc.). A sale of the Company to a larger cable programmer would result in immediate and significant cost savings as well as future revenue enhancements, value that should accrue in part to CRWN shareholders now. Housing the Hallmark channels in an established programmer would very likely enable the Company’s channels to reach full potential, something unlikely to occur under current ownership and management.
Twinleaf estimates private market value for the Company to be nearly $4 per share, more than twice today’s market value. With higher capital gains taxes looming, we strongly urge members of the Board to unlock this value immediately at what we believe is a valuation multiple peak for pay TV programming assets.