Tuesday, March 2nd, 2010
Activist Investor Opposes Recapitalization with Lawsuit
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Crown Media Holdings, Inc. (NASDAQ:CRWN) is facing criticism from at least one activist investor concerned about its recapitalization proposal that would massively dilute minority shareholders and effectively consummate a short-term merger transaction with Hallmark.
Crown Media Holdings, Inc. (CRWN, Free Analysis), owner and operator of the Hallmark Channel, announced a recapitalization agreement earlier this week. Under the terms of the agreement with Hallmark, approximately $185 million of its debt will be converted into preferred stock with about $600 million more slated to be converted into common stock.
The move struck a nerve with shareholders, including Salvatore Muoio’s S. Muoio & Co. LLC, which owns approximately 5.74% of the company. In a letter to the board of directors, the shareholder reiterated its objections to the revised recapitalization proposal and their intention to continue to pursue legal remedies in order to prevent the dilutive transaction.
“The proposed transaction remains coercive and grossly inadequate and suffers from all of the same infirmities which I have previously pointed out,” said Mr. Muoio in a letter to the board of directors. “Hallmark’s status as a creditor of the company can only be seen as opportunistic, coercive, and a breach of fiduciary duties owed to the company’s minority shareholders.”
Mr. Muoio’s lawsuit is seeking, among other things, to enjoin the consummation of the transaction on the grounds that it would unfairly and improperly dilute the minority shareholders’ interest and voting power. Hallmark would own about 90% of each class of Crown stock, which is essentially a short-form merger, if the transaction is consummated.
The proposed conversion price of $1.00 per share, at a time when Crown’s shares were trading at about $3.00 per share, was also unfair. Mr. Muoio believes that the implied valuation of $2.60 is grossly unfair and does not take into account a number of key valuation actors, and insists that the firm’s operating income and cash flows will increase significantly over five years.
“Typically in the cable programming network business, heavy fixed start-up costs for programming and distribution over a significant number of years are required,” said Mr. Muoio in a letter to the board. “Once past breakeven, profitability and free cash flow increases steadily and dramatically as a high percentage of incremental revenue flows directly to the bottom line.”
In the end, it appears to many minority shareholders that Hallmark is abusing its power as a credit and majority shareholder to enter into an opportunistic agreement to increase its stake at the expense of minority shareholders. While the company may have its hands tied, at least one shareholder intends to seek a legal way to block the transaction.
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-- Written by David Breen
