• by David Goetzl  @dgoetzl, November 13, 2006

Hallmark Channel parent Crown Media pulled the independent network off the auction block this spring, but it may return soon. A principal reason is the employment contract of new CEO Henry Schleiff. This April, a provision kicks in that gives him $6 million if a deal goes through.

Schleiff's fine print, according to an SEC filing, provides for a $6 million payout if a sale takes place after he has been on the job for six months--an amount that escalates to $9 million over ensuing years.

Schleiff has great incentive to pursue a sale within a four-year period because the $9 million payout is the most he can receive, according to the filing. One of the reasons that a sale was pursued and is likely to continue is Hallmark Channel's status as an independent network in a world where cable channels are increasingly part of conglomerates that own many of them.

"I expect him to pursue [a sale] as soon as reasonably possible," says Jefferies & Co. analyst Robert Routh in an email. "I think all the major shareholders would want that."

The Hallmark Channel brought in some $90 million in the recent upfront, on the backs of CPM increases of 8% versus 2005--well above industry peers who were in the flat-to-slightly-down range, executives said.

The $90 million take was roughly about the same as a year ago, but executives said that figure came despite a lower level of inventory sold--perhaps as little as 45%--in a move to bet on a healthy scatter market. Schleiff said the significant CPM jumps were the result of the channel successfully adding new, higher-paying clients.

Schleiff suggested on a conference call Thursday--his first since taking over in October, to discuss third-quarter results--that his priority is increasing value via more favorable carriage deals with cable operators and continued growth in ad sales.

Sale or no sale, improved financial results would benefit Schleiff, who received options for 200,000 shares of Crown Media stock when he took the helm. (His salary is $1 million a year, with the potential for a bonus up to $2 million.)

As Schleiff--the former head of Court TV who is credited with transforming that channel from a sleepy legal news outlet to a network that is formidable in prime time--touted the Hallmark Channel's growth prospects Thursday, he also cited a hurdle.

"If the challenge at Court TV was to build a brand, than I would say the task at this network is the need to market and monetize the existing and exceedingly well-regarded Hallmark Channel brands," he said. Crown operates Hallmark Channel in 75 million homes, and the smaller Hallmark Movie Channel.

Executives said Hallmark reached deals with 13 new advertisers in the upfront, including Applebee's, Bank of America and Macy's. The network has benefited from improved ratings in its target adult 25-to-54 demo and a distribution increase to 75 million--up 8% versus a year ago. In the recently completed third quarter, the company said ad revenues were $40.2 million--up 20% over a year ago.

One of Schleiff's challenges--and an issue that could have deterred potential buyers before--is that expiring carriage deals with cable operators are coming up for renewal. The company does not have other "must-have" cable channels or a fleet of local TV stations to leverage in negotiations.

Schleiff offered two reasons why he is optimistic Hallmark will be able to obtain per-subscriber fee increases: its audience demographics and programming genres. The network's "baby boomer" target audience "pays the bills," Schleiff said--which holds value to cable operators for their potential to pay for TV service as well as Internet and phone offerings.

Plus, with Congress and other government regulators interested in increasing the amount of "family-friendly" programs, Hallmark offers a way for cable operators to show their commitment to the genre. "It is in their interest economically and politically ..." he said, "to see a network like Hallmark Channel properly compensated for its contributions and success."