It’s about time for Henry Schleiff, CEO of Hallmark Channel parent Crown Media, to make a deal.
Many Schleiff watchers in the industry are clearly wondering how long it will take the erstwhile chief of Court TV to flip Hallmark.
Indeed, Mr. Schleiff has had talks with companies interested in gobbling up Hallmark, one of the largest remaining independent cable channels. Potential buyers include Time Warner’s Turner Broadcasting—which took over Court TV when it was run by Mr. Schleiff, who made a bundle on the deal—and Liberty Media.
But before that’s likely to happen, he has to renew carriage deals with four of the industry’s biggest distributors: Comcast, Time Warner Cable, DirecTV and Cablevision Systems. The current deals with all four expire by the end of the year.
As Crown prepares to announce its third-quarter earnings next week, those two sets of negotiations affect one another in complicated ways.
Mr. Schleiff, who joined Crown a year ago, has used the idea that Hallmark could be acquired by a media company with more leverage as an argument that cable companies should make a deal now.
Considering it was ranked 14th among ad-supported cable networks in total prime-time viewers during the third quarter, Hallmark gets a very low subscriber fee from operators.
Thomas Eagan, an analyst at Oppenheimer, said Comcast, DirecTV and Time Warner Cable currently don’t even pay Crown to carry Hallmark.
He had expected renewals to carry a license fee of 2 cents per subscriber per month, but now thinks Crown is better positioned to get even more favorable rates from cable operators because the Federal Communications Commission is looking into negotiations between cable operators and independent channels.
“We are in the proverbial good-faith negotiations with each of those parties, and I am cautiously optimistic that we will reach a mutually satisfactory resolution,” Mr. Schleiff said of his negotiations with distributors.
Mr. Schleiff said exhibit A for his argument that independents are ripe for picking by bigger companies is NBC Universal’s acquisition of Oxygen Media earlier this month.
Some say NBC paid a bargain price for Oxygen because investor Paul Allen was itching for a sale. That could affect the valuation of Hallmark, which tried to auction itself off in 2006 but couldn’t get an acceptable price.
But Mr. Schleiff said if Oxygen is worth $900 million, Hallmark is worth far more because it outdoes Oxygen in most key metrics.
“Take a look at 74 million homes versus 85 million homes. Take a look at their 0.3 to our ratings, which are 4 times greater at 1.2. Take a look at their ad revenues, which are about $100 million, and our revenue at $205 million or $210 million. I’m happy to use that as a benchmark,” he said.
Hallmark’s older-skewing family programming drew 25 percent fewer viewers in the adults 25 to 52 demographic than a year ago, but in a hot ad market, that’s unlikely to have made much of a dent in ad revenues, one ad market source said. The network’s holiday programming usually boosts ratings in the fourth quarter.
Mr. Schleiff acknowledged that acquisition talks could complicate his negotiations with cable operators because an acquirer might think it could strike a better deal and want him to wait.
“I think you’re right,” he said. “Let me say it this way: I wouldn’t do any deal that would encumber our future growth opportunity.”
Ken Tolle, former VP of programming and business affairs for EchoStar Communications, now with Denver law firm Moye White, said it was probably in Mr. Schleiff’s interest to get his carriage deals done unless an acquisition was nearly completed.
“You’d have to be pretty far down the road with somebody before you’d be in the ‘negotiate all you want but don’t sign a deal’ mode, because the flip side of that equation is the acquirer is going to beat you up on valuation because you don’t have deals,” Mr. Tolle said.
A key part of the value of a cable network is the distribution it has locked up. Expiring deals add little to a network’s worth.