I was planning on pitching Crown Media (CRWN) as a long this week at ~ $2.00 per share, but an amended 13D filing beat me to it. However, even after the stock's move this week, I still think Crown Media is an attractive long investment and the 13D represents the catalyst that we were anticipating.
CRWN was pitched by ringo962 in April 2009 and his write-up provides a additional background on the company. However, a lot has changed since then - most notably the 2009 debt recapitalization and the growth of the company. With all due respect to ringo, on April 2009, CRWN was an overlevered cable network trading at 20x EBITDA, with EBITDA only covering 70% of interest and with the incentives of the controlling family misaligned with shareholders since the majority of the family's investment was in the debt securities senior to the common.
Today, CRWN is trading at 10x FCF (due to very limited capex and $700 million in NOL's) and there are several distinct catalysts on the horizon, including a potential special dividend, a recapitalization and most notably, a going-private or other M&A transaction. Most importantly, the controlling family's interest is now 100% in the equity.
The write-up elaborates our views on the fundamentals of the company, the growth potential of both subscribers and affiliate fees, the logic of consolidation and the value proposition either as a stand-alone company that is deleveraging or as an attractive M&A target.
Earlier this week, the Hall family put out an amended 13D that stated:
"In connection with the expiration on December 31, 2013 of the standstill restrictions binding on certain of the Reporting Persons pursuant to the terms of the Stockholders Agreement, the Reporting Persons are evaluating their investment in the Issuer. In doing so, the Reporting Persons may consider all alternatives available to them, including: maintaining their investment in the Issuer; purchasing additional shares of the Issuer’s common stock (the “Common Stock”), either on the market or in privately negotiated transactions; engaging in a short-form merger to eliminate the minority stockholders in the Issuer or proposing another form of “going private” transaction; proposing that the Issuer’s Board of Directors consider implementing a stock repurchase program; proposing that the Issuer’s Board of Directors consider delisting the Issuer’s Common Stock from the Nasdaq Global Market and terminating the Issuer’s registration under the Securities and Exchange Act of 1934, as amended; disposing, subject to the continuing limitations in the Stockholders Agreement, all or a portion of their investment in the Issuer in a privately negotiated transaction or series of transactions; and exercising their rights under the Stockholders Agreement. In addition, the Reporting Persons will routinely monitor the Issuer’s operations, prospects, business development, management, competitive and strategic matters, capital structure, and any proposals received from third parties with respect to the Issuer. The Reporting Persons may discuss such matters with management or directors of the Issuer, existing or potential strategic partners, persons who express an interest in acquiring all or a portion of the Issuer’s equity interests or in engaging in a strategic transaction with the Reporting Persons regarding the Issuer, sources of credit and other investors. In evaluating their investments in the Issuer, the Reporting Persons will also consider alternative investment opportunities available to them, the Reporting Persons’ liquidity requirements and other investment considerations."
Obviously it will be very difficult for the family to sell their 90% interest in the company in the open market. The only two real options in my view are a) a "going-private" transaction or b) a sale to a strategic player.
What would CRWN be worth to a strategic player? Our write-up demonstrates the immense value that Crown would have due to a) revenue synergies from increased affiliate fees once the Hallmark Channel is part of a larger media conglomerate and b) cost synergies from reducing Crown's standalone SG&A. A $3.50 acquisition is not unreasonable based on $0.34 of fully taxed post synergies EPS (see write-up).
Using 11.3x - 14.2x on trailing EBITDA of $136 million gets you a $3.00 - $4.00 equity value (net of $452 million of net debt and with 360 million shares).
It will be difficult for the family to argue with those multiples since they used them themselves only a few years ago and the recent transactions since the 2009 recapitalization (Comcast's sale of A&E to DIS at 14x EBITDA and Kroenke's acquisition of OUTD at 24x EBITDA) have been at even higher multiples.
Lastly, will the controlling family try and screw minority holders? Obviously the biggest risk here is that the Hall family tries to screw minority holders - and some people will point to the 2009 Recapitalization as precedent. However, as mentioned in our write-up, we think the 2009 Recapitalization was actually very fair (in fact, probably generous) to minority holders. The company was levered 15x debt / EBITDA at the time - the family could easily have put the company into bankruptcy and taken 100% of the equity (had the debt in fact been held by hedge funds, that is almost surely the outcome that would have prevailed). So, we think the fact that the company allowed minority shareholders to retain their investment and even did the debt recapitalization at a favorable price shows that the family is not trying to screw minority shareholders and that the independent members of the board are vigilant to protect minority holders' rights (I recommend people read the court order from the shareholder lawsuit after the recapitalization for further background:
Therefore, I think now we have a healthy, growing cable network, with investments in original programming, with a rapidly deleveraging balance sheet and with a controlling shareholder that is looking to take the company private or sell it, trading for 10.6x trailing FCF.
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.