|Shares Out. (in M):||360||P/E||10.4x||8.5x|
|Market Cap (in M):||917||P/FCF||10.4x||8.5x|
|Net Debt (in M):||452||EBIT||134||141|
|Subject||RE: Process / Family|
|Entry||07/01/2013 04:41 PM|
Cameron - thanks for the comments. Your concerns are certainly valid and perhaps the biggest factor in the investment right now. I take comfort on this issue because of 3 factors: 1) the precedent behavior of the family and the board in the 2009 recap and 2011 refinancings, 2) the current economic incentives, 3) legal protections for minority shareholders.
Precedents: I place a lot of emphasis on the 2009 transaction. In my view, the equity holders should have been wiped out and the fact that they weren't speaks to how "fair" the family and the board was (indeed one could say generous). I would refer readers to the merger proxy and court order for background. Also, I would point to the 2011 refinancing as another example. The family held a convertible preferred with a 14% dividend that they refinanced with much cheaper debt. The preferred was out of the money, but I think it is another example of an instance where the family could have screwed us, but didn't, and in fact did something positive for us.
Economic incentives: Of course, the family would like to acquire the minority shares for as cheap as they possibly can, but I'm not sure I agree with you that the amount to be paid to minorities here is "not insignificant." A $0.50 per share (20%) control premium to minority shareholders would amount to $18mm - or roughly one quarter of FCF of the company. The family's shares are worth $800 million and the company is generating over $80mm in FCF, so does it make sense for them to screw us, get sued and have a transaction tied up in court with legal costs . . . all for $20mm?
I'm also skeptical that the company "gifted" the 10% equity in the 2009 recap so that they could save on future legal costs 4 years later. Regarding the other investments - not sure. They also own Hallmark Cards and some other businesses (like Crayola), but I have no insight into their overall investment plans.
Legal protections: I'm not a lawyer, but I believe we do have some legal protections here in Delaware, even with short form mergers.
a) Dissident shareholders still have appraisal rights (though this is a time consuming and costly endeavor)
b) Emphasis is placed on the price at which the controlling shareholder acquired their +90% interest - in this case, the $2.5969 conversion price in the 2009 recap. This price should serve as a floor in any transaction.
c) In order to avoid the full fairness process, the company is going to have to give consideration to the above and/or the formation of a special committee or seek a "majority of the minority" approval.
So, while I'm not naive enough to think that the family is eager to pay us a ton of money, I think the risk/reward is attractive given their precedent behavior, the relatively small amount for a premium and some legal protections.
In 2009, they "acquired" 90% of the company at $2.60 per share and hinted that any control transaction would require a $0.50 premium (under the stockholders agreement in the proxy). I don't think it's too far fetched to use those parameters now that the earnings power of the company has grown by 2x.
|Subject||RE: RE: RE: Process / Family|
|Entry||07/18/2013 11:24 AM|
Gocanucks - thanks for the questions.
1. Why was the stock languishing around $2?
I think it is a combination of reasons - the biggest being that the stock is illiquid, under-the radar with no real analyst coverage, only 10% float - but also because there is some (perhaps justified) investor animosity with the company (which gets to your second question).
2. Why are some shareholders so testy?
There are several components here:
a) It's really only two or three shareholders who are on every call and say the same thing (why are you guys public? our shares are down 50% since the recap so how can you claim to have created any value? why doesn't the board just buy us out?). It's not like this is a well-followed name, so every call you have Peter Okin from Stifel get on and rant, maybe joined by Lawrence Stern and Sal Muoio (who led the shareholder lawsuit stemming from the recap). So, I actually think the long string of testy calls is really one or two guys speaking up every quarter. Which doesn't mean they are wrong, but just want to clarify that.
b) While I think the recap was fair, shareholders here do have a right to be upset. Since the May 28, 2009 recap announcement, CRWN shares are down 18% compared to +100% for the S&P and +100-200% for other cable networks, so they clearly should be disappointed. CRWN has been a disappointing investment for the past 4 years. I think that will change soon, but it's understandable that these other long-time holders are upset.
c) One of the ironic things is if you go back to the conference calls before the recap, some investors actually complaining about why the family DIDN'T exchange their debt to address the company's balance sheet. In the ultimate case of "be careful what you wish for", 2 weeks before the recap was announced, an investor on the conference call said the following:
<Q - Robert Routh>: Yeah good morning guys. One really big question has always been one that people ask about thecompany. Everybody loves the content they love the channel, there is nothing controversial about it. Your ratings are fantastic, I mean there is nothing bad that can possibly be said about the company except one thing and that's the balance sheet. Why hasn't the Hall family been willing to convert some of the debt to equity or do something to keep the interest that's growing on those balances from eating into all the growth that you guys have built, because it's something that I can understand, I'm sure Liberty can understand it, DIRECTV or JPMorgan or any of the other shareholders. And I'm just wondering if you could address that, are there any conversations going on to rectify that situation and if not why?
3) What is the end game? I think the family wants to eventually monetize their investment and a sale to a strategic makes the most sense but honestly, I'm not sure what the family will do. Do they want to buy out the minority at $3.00 and then flip to a strategic at $4? Or do they want to buy us out at $3 when 2014 FCF is $0.35 and then pay themselves special dividends? And maybe sell the company once the NOL's run out? I'm not sure, but I think either standalone with the FCF/NOL's/special dividend or sold to a strategic, we will do well here.
Overall, I think 2.60 is the floor and 3 to 4 is our upside.
|Subject||RE: Distribution Agreement Renewals|
|Entry||07/24/2013 10:15 AM|
Lakeshow - thanks for the question. I think the likelihood of distribution agreement not being renewed is fairly low for several reasons:
1. Cost: As mentioned, the Hallmark Channel has by far the lowest affiliate fees among well-distributed networks at $0.06 - 0.07 compared to the peers at an average of $0.17 per sub per month (see write-up appendix). So the value that is "saved" by a distributor dropping the Hallmark Channel is really neglible. Take Comcast as an example. Comcast pays Hallmark probably $17 million per year in affiliate fees, out of total programming & production costs of $20 billion. So there is really no economic incentive to cut Hallmark out, especially given their ratings and audience relative to their cost. There is still a core audience of older women who watch this channel and there is no reason for Comcast or someone to drop the channel and alienate them to cut 0.085% on programming costs.
2. Hallmark Movie Channel is given away for "free": While I think we would all prefer that CRWN was compensated with additional affiliate fees for the Hallmark Movie Channel, currently it is being given away for free to distributors. So, in NYC, Time Warner Cable throws in the HMC HD as part of their HD package, but pays nothing to CRWN for that. HMC has grown from 14 million subs in 2008 to 50 million subs now and is continuing to grow. CRWN management has mentioned the fact that they "give away" HMC as something that is usually brought up in affiliate fee renegotiations.
3. Original Programming: While it's not Mad Men or Game of Thrones, Hallmark is still investing in and producing some original content that is being well-received. So while a network like TV Land gets $0.10 per sub per month for playing nothing but reruns, Hallmark is actually showing new original content that certain viewers want.
So for those reasons, I don't think the distribution agreements won't be renewed. I think CRWN will get below-market fee increases because they have no negotiating leverage as a small company, but that could obviously be solved with a sale to a larger strategic.
Lastly, regarding AT&T, I've spent a lot of time trying to understand why that happened and there's very limited information on it. I'm assuming that AT&T really just put a low-ball offer on the table and given their relatively small position in the pay-TV universe, CRWN decided not to accept. But I don't have much more information on it.
Hope that helps.
|Entry||07/24/2013 10:22 AM|
Following up on the reply to Lakeshow, on the original programming:
CRWN's Cedar Cove had 2.6 mm total viewers for its premiere, compared to 1.9mm and 2.6mm for TLC's Breaking Amish and Sister Wives, respectively, and 1.3mm and 2.8mm for Bravo's Watch What Happens Live and The Real Housewives of New Jersey, respectively.
CRWN's content is producing similar viewership as networks like TLC and Bravo, yet CRWN receives $0.07 per sub and TLC (owned by DISCA) gets $0.19 and Bravo (owned by Comcast) gets $0.21. I think this shows the "value" that CRWN gives to distributors.
|Entry||07/31/2013 01:13 PM|
CRWN reported a pretty good quarter. Revenues were up 3%, EBITDA up 11%, EBIT up 9%. The earnings figures are outpacing the topline because programming costs came down - not sure if that is entirely sustainable long term, but the earnings should still grow nicely because of the top-line and because of de-levering the balance sheet.
The FCF generation was good as the company generated $28mm of CFFO with only $600k of capex in the quarter.
LTM EBITDA $145mm
D&A (3)mm (excludes programming amortization as expensed)
TaxesAdjusted for the cash timing of the interest expense (book during the quarter, paid after), the run-rate FCF looks to be north of $80mm including the tax shield on the NOL or $0.ook expenseof
|Subject||RE: 2Q Earnings|
|Entry||07/31/2013 01:18 PM|
Damn reply function has a sensitive trigger . . . hit OK too soon.
As I was saying,
LTM EBITDA $145mm
D&A (3)mm (excludes programming amortization as expensed)
Per Share $0.28
So at 10x trailing FCF, I think CRWN still has value, there are additional levers such as refinancing the debt and a potential catalyst from a going-private transaction.
|Subject||RE: RE: 2Q Earnings|
|Entry||11/07/2013 11:38 AM|
gocanucks - our thoughts on CRWN remain the same. We think the 3Q looked OK, not great. The topline was good with the growth in both advertising revenus and subscriber fees, but programming costs hurt profitability. As you mentioned, this isn't unique to CRWN (see TWX guidance/WSJ article) and some companies get more of a pass than others, but overall, I think it's an important investment the company is making.
The value to a potential acquirer is much higher than the current price, but the family is being very tight-lipped, as usual. Given the focus that this is getting along with the company's improving financial position, I think we will get a fair outcome . . . the best case scenario is obviously a sale to a strategic.
|Entry||11/20/2013 10:14 PM|
Sorry about that - I think I moved some folders around and the link broke. New link:
|Subject||Seems cheap here|
|Entry||01/28/2014 02:14 PM|
ElmSt - any updated thoughts? Based on the strength of the last quarter, stock seems cheap here and possibly worth meaningfully more than your original value estimate, no?
Thanks in advance.
|Entry||02/23/2014 10:36 PM|
Cuyler - sorry, I missed your comment last month and didn't get a chance to respond. We still own our full position in the stock. I really didn't have much to add other than to say we still like the stock.
With regard to the recent results, the earnings were pretty attractive. Double digit top line growth, good earnings growth and strong FCF. Operationally, good results with strong ratings, continued focus on original programming and sub growth at Hallmark Movie Channel. The earnings call was colorful (as always) with many pointed questions and silence from management. Eventually, something has to happen. It just doesn't make sense for this company to be public.
I think the stock is still attractive given:
- The top line growth from advertising and affiliate fees (the channel still has one of the lowest fees of any cable network)
- The FCF given limited capex needs, the NOL and the ability to refinance their high cost debt in 2015 ($43 million in LTM interest based on 10% interest rate when the bonds are yielding 4%).
- The potential for M&A - either a take-private or a sale to a strategic: In light of Comcast-Time Warner, this business just needs to be in the hands of a larger media company to compete
- The potential for getting distribution back at AT&T, per comments on the call.
With a $1.2 billion market cap and $160 million in LTM EBITDA, $43 million in interest, minimal capex and a lot of NOL's, the valuation is still attractive at 10x FCF (untaxed). The net debt is now less than 3x EBITDA, so there is a lot of flexibilty with the balance sheet.
Lastly, while no one knows what the management will do, there is enough gadflies every quarter (including my favorite - Peter Okin) to keep them honest. Given the valuation ranges that they outlined in the 2009 debt recap proxy, I think it would be very difficult for the family to low-ball minority shareholders, especially after the litigation last time.
Select comments from the earnings call:
Q - Lawrence M. Stern>: Okay. From a strategic perspective, is management interested in having Crown Media remain in the public marketplace, because after your best quarter and best year and highest ratings, this independent cable channel still has no analyst coverage anywhere on the Street?
<Q>: One other question, one last question. I know it's a tough question, but why do you feel – we've got an illiquid market in terms of this – there's hardly any stock that really is out there compared to the number of shares that are publicly owned, 90%? Is there a reason why Hallmark wants it out there? Is there – certainly if this was a Nexstar or this was a content provider with what you just printed and how you are operating of late and the wholesomeness of it, you'd be doing a lot better with the market rewarding and clapping and jumping up and down. Because of the lack of liquidity or the ability to have analyst coverage, as the other fellow just mentioned earlier on, he's 100% right. We have here a Catch-22. What's the reason for us still being out here if we can't liberate what you guys are celebrating?
|Subject||iNSIDER BUY AT THE HIGHS|
|Entry||03/06/2014 03:06 PM|
DJ VP STANFORD Buys 6,000 Of CROWN MEDIA HOLDINGS INC >CRWN
Thu Mar 06 14:24:36 2014 EDT
SOURCE: Form 4 ISSUER: CROWN MEDIA HOLDINGS INC SYMBOL: CRWN (CL A) FILER: STANFORD CHARLES L TITLE: Vice President DATE TRANSACTION SHARES PRICE VALUE 3/4/14-3/6/14 Purchase 6,000 $3.55 $21,320 OWNERSHIP: 18,750 (Direct) 31,500 (Indirect) The Form 4 is filed with the Securities and Exchange Commission by insiders to report transactions in their companies' shares. Open market purchases and sales must be reported within two business days of the transaction. Insider Data Source: The Washington Service
|Subject||RE: iNSIDER BUY AT THE HIGHS|
|Entry||03/10/2014 10:24 AM|
Thanks Kiss . . . this is an interesting one. Charlie Stanford is the General Counsel, who's always playing Bad Cop on the earnings calls. 6k shares isn't really a big deal, but considering that a) Stanford only owned 13k prior to this purchase so it's a 50% increase and b) he's the conservative lawyer, it's not a bad sign.
|Subject||RE: Head of IR fired - implications . . .|
|Entry||04/01/2014 09:50 AM|
|Subject||CRWN 4Q 2014|
|Entry||02/20/2015 05:07 PM|
It's been a while since I've updated CRWN. I think the company is still attractive. Solid quarter, solid outlook with high single digit revenue growth and double digit earnings growth, but we continue to be stone-walled by the family on return of capital. I think it’s a matter of when, not if, because the company continues to generate cash, the leverage is coming down significantly and the family will need to get their money out at some point.
Adjusted EBITDA $172mm (excluding 1-time items but including share based comp)
Market Cap $1.2 billion
|Subject||Re: CRWN 4Q 2014|
|Entry||03/23/2015 03:05 PM|
thanks for the idea/update. this has been one of my top positions, and it is nice to see the stock finally reacting to good news on pretty decent volume.
i think the stock is worth around $4.50 as a stand-alone entity, and further upside will have to come from better monetization (changing mix of subscription/ad from 20/80 to 50/50 common with peers) and/or cutting SG&A, neither of which is likely unless the company is sold to a bigger entity. I peg the monetization option to be worth $1-1.50/share and cost synergy 50c.
i notice that you said you continue to be stone walled by the family. time seems ripe for the family to sell, but they don't seem to have great track record with capital allocation (or maybe not motivated enough).
curious as to how you think about valuation/scenarios.
|Subject||Re: Re: CRWN 4Q 2014|
|Entry||03/26/2015 05:41 PM|
Thanks gocanucks - yes, nice to see this stock get some love.
I don't disagree on your math.
My comments on the family capital allocation were really based on the fact that, for the first time ever, this company is actually going to be over-capitalized soon. The family has forever been a provider of capital - initially through the debt and then through the infamous recapitalization. I can't imagine that the Hallmarks card business is doing that well, so as long as the Hall family is economically rational, there should be a special dividend or some form of capital return.
In terms of scenarios, I think we see something within 12 months - but I have no view as to whether it's a special dividend, re-cap, MBO, etc. Otherwise, I'm happy to wait and have the company grow and pay down debt.
Lastly, interesting little blurb in an otherwise cautious WSJ media article:
Bill Abbott, chief executive of Crown Media Holdings Inc., which owns the Hallmark Channel, said he expects the company to secure double-digit volume increases this year, as it did last year. Still, Mr. Abbott isn’t resting easy.
“We sleep with one eye open,” he said. “At one point we could be susceptible to the broader industry trend."
|Subject||Re: balance sheet?|
|Entry||05/25/2015 07:43 PM|
Hi Martian - sorry, perhaps "overcapitalized" wasn't the right term but I think the debt levels are low enough now that there is optionality for different ways to return capital to the Hall family - either a special dividend or take-private or something else.
There is $306mm of net debt with $185mm in EBITDA, $4mm in depreciation and $36mm in run rate interest expense (pre-refinancing). So with 1.7x net debt / EBITDA, very little capex and the NOL's shielding cash taxes, I think the balance sheet is underlevered.
|Subject||CRWN refinancing the 10.5% bonds|
|Entry||06/25/2015 05:52 PM|
CRWN saves over $20 million in interest expense annually on the refinancing and with EBITDA of $185mm vs. $10mm of pro forma interest expense and minimal capex and cash taxes . . . there is a lot of FCF (even after the excess cash flow sweep in the new credit agreement) that has to go to all shareholders (Hall family and public minority holders alike).
Last step, sell the company or take it private at the same 11-14x EBITDA multiple used in the fairness opinion for the debt recapitalization proxy = $5.00 - $6.40 per share
Crown used the proceeds of the loans made on June 25, 2015 to (1) repay amounts due under the Credit Agreement dated as of July 14, 2011 among Crown Media, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, as amended by that certain Amendment No. 1 dated March 29, 2013 (the “Existing Credit Agreement”), and (2) pay fees, commissions and expenses in connection with the Credit Agreement, the repayment of amounts due under the Existing Credit Agreement, and certain other fees and costs. The proceeds of the Delayed Term Loans will be used solely to fund the redemption of Crown Media’s 10.5% senior notes. Crown Media will use the proceeds of other borrowings that it makes following the effective date of the Credit Agreement for general corporate purposes.
|Subject||CRWN offer at $5.05|
|Entry||03/09/2016 10:14 AM|
Not entirely unexpected - CRWN received a short-form merger proposal from the Hall family at $5.05. We all knew that a) the family would give us a crappy price and a crappy premium (2.5% from yesterday's close) but b) that price would still be well in excess of the $2.00/$2.50 share price from summer 2013.
In our last comment in the message thread, we stated that using the 11x-14x EBITDA multiple range from the debt recap proxy would yield a price in the $5.00 - $6.40 range. Given the most recent LTM EBITDA and net debt metrics, the same multiples would yield $5.30-$6.87 with a midpoint of $6.08.
I believe under Delaware law, the family has to offer more than the price at which they took control ($2.70), but that dissident minority holders can sue for appraisal rights.
Could someone argue that the EBITDA multiple should be higher given the growth in CRWN's advertising revenues, ratings and distribution in a world where cable networks have generally suffered?
Can someone also argue that the family deliberately spent more on programming costs recently to depress EBITDA levels? Perhaps . . .but the family can argue that cable networks are disadvantaged now given skinny bundles, etc, so a lower multiple is justified.
I think that the family is offering a low-ball price and that a bump in price is justified given the small dollar involved in the float: a price bump to $6.00 would only be $33 million on the 35 million minority shares, which is probably what the legal costs would be to fight this out in court. However, given the small float, it's tough to see someone like Elliott step in and litigate.
All in all, this is a disappointing outcome, but still a successful investment over 2.5 years.
|Entry||05/03/2016 03:42 PM|
The Hall family closed the take-private merger with Crown Media yesterday at $5.05, valuing the company at $1.8 billion. In the merger proxy, the family kept saying that the EBITDA would remain depressed and cash flow would remain pressured becaues of content programming costs.
One day later, the company reports 1Q earnings:
Revenues + 23% y/y
The company generated $67mm in FCF for the 1Q alone. So, it looks like the Hall family stole Crown Media at 9x FCF and that FCF is growing.
I hope someone sues for appraisal rights.