June 5, 2014
Mr. Herbert A. Granath
Co-Chairman of the Board of Directors
Crown Media Holdings, Inc.
XXXXXX, XX XXXXX
Dear Mr. Granath:
I write on behalf of our investment management clients who collectively own 502,055 shares of Crown Media (CRWN) stock. It has been nearly two years since my letter of September 25, 2012 urging you and your fellow members of our Company’s Board of Directors to maximize the value of our Company by selling it to a strategic buyer capable of bringing scale, operating efficiencies and elevating the two Hallmark channels to full potential while rewarding shareholders in the process. A copy of that letter can be found on our website and a copy of this letter will be sent to your fellow Co-Chairman and controlling shareholder, Mr. Hall, at Hallmark and also posted to our website. For the reasons outlined below, the urgency of my 2012 request is now at a critical stage since we believe that valuations for pay TV networks have passed peak and there is risk that the Board will entirely miss the window for selling our Company at a premium. With this in mind, I remind you that a Board’s fiduciary duty is to all shareholders, not just to the controlling shareholder.
While we applaud the Company’s stock price performance over the past 21 months, we believe that future valuation gains will be much harder to achieve if the Board insists on maintaining our Company’s independence. Since my last correspondence, we’ve revised upward our estimate of our Company’s value to a strategic buyer to $5 per CRWN share, some 40% above the current market price, based on an 11x multiple of 2015 adjusted EBITDA of $180 million. However, we do not expect the exit window to be so favorably open forever and, indeed, the exit multiple perhaps would have been 12x-14x had the Board acted last year.
Lest you believe that achieving $5 per share for CRWN shares in the public market is easily achievable, allow me some quick calculations. Applying the approximate 9x multiple that public investors seem willing to pay for CRWN shares suggests that reaching $5 per share isn’t plausible until at least 2018, assuming a mid-single digit annual growth rate and accounting for cash generation boosted by the use of the Company’s federal tax benefits. Should that 9x multiple compress as business conditions become more challenging, that mid-single digit adjusted EBITDA growth rate becomes much less certain and $5 per share stretches further out on the horizon.
Indeed, the industry outlook is less bright than at any time in recent history. Pay TV distributors are consolidating aggressively and will use enhanced leverage to demand better terms from programming networks. In fact, just this week AT&T said in an SEC filing that it believes it will realize $1.6 billion in cost savings from its acquisition of DirecTV over three years, most of it in reduced programming fees. Our Company’s puzzling inability to gain distribution in AT&T’s 6 million u-Verse homes further raises the risk of an AT&T-DirecTV combination. Here I repeat the theme of my 2012 letter: without a stable of sister networks and a well-connected parent company, the Hallmark channels lack the negotiating clout necessary to effectively compete for license fees from bulked-up distributors.
Meanwhile, audiences are fragmenting away from pay TV networks. Developing original programming is more challenging and expensive than ever before. Maintaining Nielsen ratings stability and generating corresponding ad dollars will be increasingly difficult in a more complex and competitive video advertising marketplace.
In short, our Company seems likely to be squeezed in coming years in both segments of core revenue generation, distributor fees and advertising sales. Therefore, the case for remaining an independent, sub-scale, publicly traded company is severely flawed. Given the shifts in technology and distribution and changes in consumer content consumption habits, we believe that it is not only illogical but irresponsible to continue operating as an independent company in a mature industry populated by media powerhouses.
I would welcome the opportunity to meet with you to discuss the contents of this letter and my earlier one. If you disagree with my analysis and forecast, I urge our Company’s management and Board to communicate its vision for value creation as an independent company. If, as I suspect, there is no such vision, please immediately pursue a professionally-managed auction of our Company to realize maximum value for all shareholders.
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