Crown Media (CRWN): SEC Filing from Hallmark Triggers Buying

June 26, 2013

Nine months after our detailed letter to the board of directors of Crown Media Holdings (CRWN) urged a prompt sale of the company, a regulatory filing from 90.3%-controlling shareholder Hallmark Cards, Inc. this week hinted at such an event and sparked furious buying of the stock.  

The purpose and timing of the SEC filing, made public after the market close on Monday June 24, was a bit puzzling. Despite no apparent obligation to do so, Hallmark chose to remind investors of the upcoming expiration of a standstill agreement with minority shareholders and that all its options remained under consideration with regard to its Crown Media investment.  The filing stated that Hallmark could, after the standstill expiry on 12/31/13, elect to purchase the 9.7% minority stub and take Crown Media private.  Alternatively, it could elect to sell CRWN to a third party.  Left unsaid was that Hallmark would no longer, upon the 12/31 expiry, be obligated to pay minority shareholders a 50 cent per share premium in the event of an outright sale of the company.  And why would Hallmark make the filing a full six months prior to the expiry?  We can only conclude that its lawyers are advising excessive disclosure in light of prior litigation and lingering ill will between Hallmark and minority shareholders.    

For those curious as to why a standstill agreement and a 50 cent per share premium are in effect here, they are provisions of litigation settlement between Hallmark and minority shareholders stemming from a controversial debt-to-equity recapitalization of Crown in 2010. Hallmark converted its substantial debt holdings in an underperforming and overleveraged Crown Media to equity, thus its 90.3% ownership.  

None of this information from Hallmark was particularly revealing to CRWN investors who have been paying close attention but the episode does provide an instructive look at how markets behave. Despite our activist letter to the board in 2012 (which was, not surprisingly, ignored), it has been and continues to be a foregone conclusion to us that Hallmark will wait for the 12/31/13 standstill expiry before selling Crown to a third party rather than attempt to take the company private.  (Though the 50 cent per share premium amounts to only $17.5 million using 35 million shares in public hands, it is, after all, $17.5 million that can be saved by Hallmark deferring a sale of Crown until 2014.)  Yet, as recently as last week, the market valued CRWN shares at less than half what we believe shares to be worth in a sale of the company. More specifically, we believe that Crown Media is worth $1.9 billion to $2.2 billion (including debt) to a strategic buyer or $4 to $4.80 per CRWN share.  CRWN shares have rallied from $1.85 per share on Thursday 6/20 to $2.65 (45%) in less than a week, yet remain substantially below our target take-out price. For the stock to rally this week from ridiculously low levels, it was as if the market needed a reminder that a CRWN liquidation event is very likely in 2014.  

Regarding prospective buyers for Crown Media, we continue to view CBS and Scripps as very logical candidates and a handful other plausible suitors that could include Discovery, Disney and Fox.  As noted in our letter to the Crown Media board in 2012, at least $50 million of redundant expenses are likely to be realized by a strategic buyer and certain revenue enhancements in both advertising and distribution should be achievable as well.  

We hope that the Crown Media board effectively auctions the company in 2014 to maximize value for all shareholders.

CRWN shares are a top holding in Twinleaf client accounts.