Milestone: Hallmark Channel at 5

After a year on and off the sales block, what's in the cards for the Hallmark Channel?

It's not easy being an independent in the corporate jungle. Just ask the Hallmark Channel or its parent company, Crown Media Holdings Inc. A year ago, Crown began looking for a buyer for the network it had turned into a formidable basic cable force; since its debut in 2001, Hallmark Channel had grown to reach 73 million households, consistently landing among the top 10 in the ratings with its steady offering of family-friendly original movies and off-network series.

The thinking was that an entertainment conglomerate such as the Walt Disney Co. or News Corp. would scoop up the stand-alone service to bolster an existing roster of cable networks. But while offers were made, Crown's owners deemed them too low based on the roughly $11 per share at which the company was then trading on the NASDAQ exchange, and in April, Hallmark was taken off the block.

Now, as Los Angeles-based Hallmark Channel celebrates its fifth anniversary, management seems to be opting for Plan B: investing in new programming and cleaning up the balance sheet to make the company more attractive. While no longer officially for sale, it's common knowledge that the current owners, which include Liberty Media International Inc. and JPMorgan Chase, would be happy to entertain serious proposals.

Hallmark Cards Inc. holds a 67% stake in Crown, making it majority owner, and while the Kansas City, Miss.-based card company can't be happy about losses like 2005's $233 million in red ink, it has managed to turn lemons into lemonade: It reportedly has a tax-sharing agreement that allows Hallmark to apply Crown losses against the parent company's gains.

Neither Crown executive vp and chief operating officer Paul FitzPatrick, who also is acting CEO, nor chief financial officer William Aliber would comment for this report, but early this month, Hallmark CEO and president Donald Hall Jr., who also is co-chairman of the board at Crown, told the Kansas City Star, "Our relationship with Crown Media has been mutually beneficial. Crown Media has been able to leverage the consumer recognition and strength of the Hallmark brand."

Conventional wisdom is that while the privately held, 96-year-old greeting card firm and its minority investors might like to sell, they don't need to.

But straddling the line between for sale and not for sale has left Crown in a sort of limbo regarding Hallmark Channel. Although clearly moving forward, as evidenced by a recent multimillion-dollar deal to license 39 Warner Bros. features, including 2004's "Troy" and 2005's "March of the Penguins," Crown hasn't had a CEO since David Evans resigned in June. (Evans has since resurfaced as the head of global new-media operations and channel development for RHI Entertainment, which produces the Hallmark Hall of Fame telefilms and was itself a Hallmark subsidiary until December, when it was sold back to an investor group that included RHI founder Robert Halmi Sr.) One of Crown's goals for the year is a 20% staff reduction designed to trim $13 million-$14 million or more from the balance sheet.

Jefferies & Co. Inc. equities analyst Robert Routh feels that cutting costs and focusing on programming will put Crown on the right track. (Aside from the Hallmark Channel, Crown's other main assets are a 3,000-hour library, valued at $375 million, and the Hallmark Movie Channel, launched in 2004 and expected to reach more than 9 million subscribers by the end of the year, according to Kagan Research Llc.)

Crown stock, which trades under the symbol CRWN, sank when a sale failed to go through but again is showing signs of life. "The stock is starting to bounce back," Routh says. "It hit a low of $3 and change. Now, it's about $4.25."

Routh says Crown could have sold the company if it had so desired. "They had offers, but they wanted their price," he says. One mitigating factor is the company's relatively high debt ratio, which approaches 50/50, with more than $800 million in debt against $1 billion in equity. But because $750 million of that debt consists of loans from Hallmark Cards, Routh says there's virtually no chance that Crown will be forced into bankruptcy, and if it can stay the course, the company's outlook will only get better.

"They're losing money on an accounting basis, but ultimately, you'll see their affiliate fees growing, and because their ratings are so high, ad revenue will grow, too," Routh says, noting that he has no financial interest in Crown and does not trade in the stock.

Indeed, Hallmark Channel enjoyed its highest-rated year to date in 2005, with viewership up 34% in total day household ratings among all ad-supported cable networks, according to Nielsen Media Research, which says the network ranked seventh in growth.

"This remarkable ratings performance is the result of the channel's ongoing original programming, appropriate for audiences of all ages," says David Kenin, executive vp programming for Hallmark Channel and Hallmark Movie Channel. While Hallmark Channel targets viewers in the 25-54 age range, it's believed to skew to the older edge of that spectrum.

Within that group, the network has galvanized enthusiastic support. Kenin says the channel's "Meet the Santas" was the highest-rated ad-supported basic cable movie of 2005, garnering a 3.6 household rating. With nary an original series in sight, telefilms are Hallmark's forte, and the channel intends to continue capitalizing on them. Over the past 10 years, Kenin says other networks have come "not to rely on the original movie as a source of their appeal and power. And our movies are really unlike Lifetime, (Sci Fi Channel), (USA Network) and TNT's. ABC Family, who makes movies, skews to a much younger audience than we do."

Kagan estimates Hallmark channel will spend $131 million on programming this year. Kenin says he focuses on long-standing brand recognition when programming the network. "We think of it as characterized by family, caring, trust and celebration," he says. "So, almost all of our movies either represent an emotional story about families or relationships, or they are classic genres such as westerns or mysteries."

One such emotional family story, "Hidden Places," a tale of faith and love on a farm during the Depression, earned Shirley Jones an Emmy nomination this year. Over the years, Hallmark programming has garnered a total of 78 Emmy wins, mainly for its Hall of Fame presentations on the broadcast networks, to which Hallmark Channel has cable premiere rights (though Hallmark Cards, not Crown, owns those programs).

"This network has maintained and built upon the reputation of Hallmark and Hallmark Hall of Fame in the highest possible way, and it is truly unique because of the loyalty that people have toward the brand," says Laura Masse, senior vp marketing for Hallmark Channel and Hallmark Movie Channel. "It's a real destination, and that means viewers are engaged with what they see, and that certainly benefits our business partners." Noting that it's a disadvantage not to have sister networks for cross-promotion, Masse says, "While we don't have a horizontal family of networks, we do have a vertically integrated family in the (more than 4,000) Hallmark Gold Crown stores and with Hallmark.com. We have had to be very creative, and I think we are bringing different opportunities to the table for each of our constituents."

That creativity includes allowing sponsors the opportunity to be sole advertisers for original movies, a notion embraced by companies such as Hallmark Cards and Kraft Foods Inc. On-air billboards, tagged interstitial promos and custom bumpers help sell the package. Taking a page from its parent company, Hallmark Channel also ties promotions to such holidays as Valentine's Day, Mother's Day, Father's Day, Halloween and the lucrative period between Thanksgiving and Christmas.

"At each of those times, we are platforming on our air one of our original movies that is linked to that holiday, and then it is advertised through bag-stuffers in our Gold Crown stores," Masse says. "We are very much a family destination for holiday viewing. This past holiday season, we attracted 17 million new viewers to the network. The partnerships we have forged with our sister companies is a very rich mine for us to keep digging."
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