Letter to the Crown Media Holdings Board of Directors

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.  Twinleaf has closely analyzed the Company and the pay TV industry and we believe that there is no scenario over the next several years in which CRWN management and the board can deliver a return to shareholders superior to what we believe a sale of the Company would realize today.  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 indicated an interest in owning more cable programming assets.  With its superb track record in broadcast television and its slim cable profile, CBS is a very logical prospective buyer of the Company and a combination of the CRWN assets with CBS should be actively pursued.
  • The pay TV industry is mature in the US, the Company’s sole operating territory.  Forecasts are for flat subscriber growth for the industry, limiting affiliate fee revenue growth for 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 television advertising avoidance and we do not believe that advertisers will blindly and forever support a marketing vehicle with declining effectiveness.  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 restrictions on international expansion, limitations that overexpose the Company to slow-growth conventional domestic distribution (cable and satellite) and limit promising ancillary revenue opportunities.   
  • CRWN’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 a result, 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 is increasingly poorly positioned.  Attempts to boost affiliate fees or, worse, maintain carriage with certain distributors will become more challenging.  Look no further than the Company’s 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.  


Finally, we question the need for a company with a 90.3%-controlling shareholder to have 14 directors on its 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 summary, 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.  Additionally, 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, especially ones without international growth opportunities. 


Sincerely,




Spencer Grimes

Principal


Note:  Twinleaf client accounts have added more shares of CRWN since this letter was sent and posted.