New management team puts some polish on Crown Media: parent of Hallmark Channel makes some strides in turnaround.

Though the company is still far from being in the black, things are looking brighter for Studio City-based Crown Media Holdings Inc.

Over the past 14 months, the company's new management team has executed a savvy film slate pickup, renewed a sizeable cable carriage deals and seen a surge in advertising revenue.

The company--home of the family-friendly Hallmark Channel--has seen its stock approach its 52-week high, trading in the mid-$7 range last week. The company's shares foundered last year, dipping as low as $2.94 in the wake of top management upheaval and an aborted sale attempt.

Even the ratings are up for the basic cable stalwart Hallmark Channel.

"It's hard to say anything is unique right now, but there are very few other networks offering a guarantee of clean, family-friendly programming," said Chief Executive Henry Schleiff.

The 6-year-old channel offers 20 original movies a year, and Schleiff said that would increase to between 26 and 30 next year, along with a possible mini series.

Hallmark finished 2006 as the ninth-ranked advertiser-supported cable channel in U.S. households, but it was sixth in the fourth quarter. During December weekend prime time, it was the most-watched ad-supported channel, topping competitors like TBS and USA Network.

Dark days

Things were at their worst for Crown last year, following the exit of President and Chief Executive David Evans and Chris Moseley, the Hallmark Channel's veteran executive vice president and chief marketing officer. Just prior to Evans' exit, the company, which had been for sale for nearly a year, took itself off the market. News Corp., Comcast Corp. and billionaire Phil Anschutz each explored buying the company but balked at the $2 billion price.

The turnaround began just before the new management arrived, in the form of Chief Executive Harry Schleiff, the former Court Television Network chief executive who came on board in October, and senior vice president Brian Stewart, who was promoted to executive vice president and chief financial officer.

Last June, Hallmark acquired from Warner Bros. Domestic Cable Distribution the U.S. rights to a 39-film slate--the channel's largest acquisition ever--including the network television premiere of the Academy Award-winning documentary, "March of the Penguins," "Troy," featuring Brad Pitt and Orlando Bloom, as well as feature films "Miss Congeniality" and "Phantom of the Opera."

In October, Hallmark sold domestic rights to its 600-title library, highlighted by television series and made-for-TV movies such as Larry McMurtry's "Lonesome Dove," for $160 million, and used the money to pay down its $900 million debt. Crown Media kept the right to continue to broadcast selected titles from the library on the Hallmark Movie Channel for up to two years.

Crown recently renegotiated deals with cable system operators--which make up more than 80 percent of the total Hallmark subscriber base--to increase license fees.

The network has more than 80 million subscribers now, and Schleiff said he expects to close the year with about 85 million--edging close to full distribution. Crown's next carriage deal comes up in the fall.

"The size of the (subscriber) base is not so much the issue, it's what the per-subscriber average license fee is," Schleiff said. "We've made substantial progress in the three deals we've had the chance to negotiate."

There are still big hurdles: the standalone network's anemic per-subscriber license fees are still at a fraction of what other cable channels get. Much of Crown's future success hinges on the ability to bring the take up from the network's current average of 4 or 5 cents to closer to the 15 to 20 cents for cable channels with comparable viewership.

When they were up for sale Hallmark opted not to re-negotiate some of the deals that will expire at the end of 2007, hoping that a buyers increased muscle would help them. Now, it could hurt.

Alan Gould, an analyst with Natexis Bleichroeder Inc. who set a target price for the stork at $3.85 this fall, said every incremental penny on the license fees is worth a $1.13 a share to Crown's stock price because it's hugely leveraged.

"All that incremental revenue would fall right to the bottom line; there's no incremental cost that comes with that," Gould said. "Does the Hallmark Channel deserve higher license fees that it's getting? Yet it does, but I am not sure in this environment that operators like Comcast and Time Warner are willing to ante up that much more money, especially with the broadcasters breathing down their necks."

Turning it around

Crown's first quarterly results were improved, while still a long way from profitability. Crown registered a net loss of $40.2 million, or 38 cents a share, compared to $47.2 million, or 45 cents a share, a year earlier.

Revenue for the quarter increased by 19 percent to $53.6 million. Subscriber fee revenue in the first quarter jumped 20 percent to $7.5 million. And ad revenue increased 20 percent to $46 million, reflecting higher advertising rates. To reward the impressive numbers, Crown extended the contract of one of its top ad sales execs, Bill Abbott, through 2009.

Some analysts have noted that the firm is still operating in the red and think the stock surge may signal a possible sale.

"Looking at it from afar l would think this could signify that there may be another buyer floating around in the background," analyst Dennis McAlpine of McAlpine Associates said.

BY ANNE RILEY-KATZ

Staff Reporter