Earlier this week Klarman's Baupost Group purchased an additional 437,000 share of RHI Entertainment (RHIE) at $1.19 a share. Klarman now has 36.9% of the outstanding shares.
Here is the trading data for this year. (Click to enlarge)
Klarman has been in touch with management as the 13D/A stated:
"The shares were acquired for investment in the ordinary course of business. Although the Reporting Persons intend from time to time to discuss with management issues about the Issuer and its strategic direction..."
So, what is RHI Entertainment (RHIE) and what do they do?
RHI Entertainment, Inc. develops, produces and distributes new made-for-television movies, mini-series and other television programming worldwide. The Company provides long-form television content, including domestic made-for-television [MFT], movies and mini-series. It also selectively produces new episodic series programming for television. In addition to its development, production and distribution of new content, it owns an library of existing long-form television content, which the Company licenses primarily to broadcast and cable networks worldwide. RHI Entertainment, Inc’s business is comprised of the licensing of new film production and the licensing of existing content from its film library in territories worldwide. Licensing rights in its film library generate contractual accounts receivable. The contractual accounts receivable reflects license agreements it has entered into with third parties for rights to its film content in future periods.
Now, this is an interesting one because a quick glance at the financials reveals nothing that would make someone jump up and say "I've been buying at almost 5 and now it is under 2, let's pick up a whole lot more shares". This is, however just what Klarman did. Klarman is also one of the best investors out there now so paying attention to him makes sense.
It also makes finding out what there is about this he likes worth the time.
First, let's get into more detail on what they really do and to find it we'll comb the 10-K filing with the sec.
We develop, produce and distribute new made-for-television movies, mini-series and other television programming worldwide. We are the leading provider of new long-form television content, including domestic made-for-television, or MFT, movies and mini-series. We also selectively produce new episodic series programming for television. In addition to our development, production and distribution of new content, we own an extensive library of existing long-form television content, which we license primarily to broadcast and cable networks worldwide.
Our business is comprised of the licensing of new film production and the licensing of existing content from our film library in territories around the world. Licensing rights in our film library generate contractual accounts receivable. The contractual accounts receivable reflect license agreements we have entered into with third parties for rights to our film content in future periods. The ability to license our library content in this manner provides us with visibility into long-term library cash flow
Our MFT movie franchise focuses on the production of films with dramatic, suspenseful, or more recently, action/thriller storylines which are generally two broadcast hours in length. With production costs of $1.0 to $2.0 million per broadcast hour, our MFT movies limit our financial risk with their short production cycles and pre-sales which typically recoup the majority of our cost of production. In 2007 and 2008 our pre-sales equaled 84% and 70% of our MFT movie production costs, respectively. The decline in pre-sales as a percentage of production costs reflects lower sales activity resulting from the general economic slow down in the second half of the year and our operating decision to provide exploitation windows for programming on ION Media Networks (ION) and/or pay-per-view (PPV), prior to exploitation windows on broadcast or cable networks.
MFT movies are ordered by broadcast and cable networks and have become an integral part of the broadcast strategies of these programmers. Networks license the rights to air films that meet the characteristics of the network’s genre and therefore will appeal to their viewers. In 2008, we delivered multiple MFT movies to the Hallmark Channel, Lifetime, the Sci-Fi Channel and Spike TV. In 2009, we have completed development and have begun production for several MFT movies, which have already been licensed to broadcast and cable networks.
Over the past 20 years, we have shaped the mini-series industry with award winning and highly-rated releases like Lonesome Dove, Gulliver’s Travels, Human Trafficking, Tin Man and Mitch Albom’s The Five People You Meet in Heaven. A mini-series is typically four broadcast hours in length and production costs are approximately $2 to $5 million per broadcast hour of content. Typically, mini-series are ordered by broadcast and cable networks on a picture-by-picture basis. In 2007, we pre-sold more than 100% of our production costs for mini-series. In 2008, the pre-sales were 80% of our production costs for mini-series, reflecting the lower sales activity resulting from the general economic slowdown in the second half of the year and our operating decision to provide exploitation windows for programming on ION as noted above.
Long-form television library
With more than 1,000 titles, comprising over 3,500 broadcast hours of long-form television programming, our library is an important source of contractual cash flow, revenue and growth for our business. Our film library is enhanced each year with the addition of new MFT movies, mini-series and other television programming as their initial licenses expire. These new productions add value to the film library and ensure that it remains current. We believe that the talent and recognizability of the actors and actresses starring in our productions, along with the subject matter, result in our library having a long shelf life. Classic MFT movies and mini-series such as Cleopatra, Alice In Wonderland, Call of the Wild, Dinotopia, Arabian Nights, Merlin, The Odyssey and The Lion in Winter are examples of our library content which have been repeatedly licensed to our customers over the last several years.
Our productions have won 105 Emmy® Awards, 15 Golden Globes Awards and eight Peabody Awards.
Now, put your thinking cap on here. The company's top customers are the Hallmark channel and Lifetime. What risk is there that they could lose, say the Hallmark account? This is why you read the 10-k notes:
On January 12, 2006, HEI Acquisition, LLC acquired all of the membership interests in Hallmark Entertainment from HEH, subject to a Purchase and Sale Agreement (NYSE:PSA) dated November 29, 2005 (the Acquisition). HEI Acquisition, LLC was immediately merged with and into Hallmark Entertainment and its name was concurrently changed to RHI LLC. RHI LLC’s sole member is Holdings, a limited liability company controlled by affiliates of Kelso. (RHI owns 46% of Kelso...note mine)
The Company acquired Hallmark Entertainment in order for it to execute its business strategy. The purchase price reflects the Company’s assessment that Hallmark Entertainment could be managed more efficiently and profitably when operated independently allowing the Company to refine its business model and production strategy by focusing on the most profitable content rather than volume, broadening and diversifying the type of content that it develops, produces and distributes and exploiting new distribution opportunities.
You know the "Hallmark Original" movies you see on the channel? Yup, they make em'. A 2008 10-Q says it more clearly. But in the words of Apple's Steve Jobs "wait, there's more". The Hallmark Channel is owned by Crown Media Holdings (NASDAQ:CRWN). Back to the 10-k:
On October 5, 2006, the Company entered into a definitive agreement with Crown Media to purchase Crown Media Distribution, LLC for $160.0 million (subject to certain accounts receivable adjustments). The assets of Crown Media Distribution, LLC are comprised of a completed film library consisting of approximately 550 titles and approximately 2,400 hours of programming (Crown Film Library) and trade accounts receivable.
So, you know the "Hallmark Hall of Fame" movies? Yup, they own them. From Crown's recent 10-k:
Until we sold our domestic library to RHI Entertainment LLC on December 15, 2006, we licensed our film assets to broadcasters and video distributors (pay television channel providers) who paid a license fee for the right to exhibit or distribute the programming over a certain period of time.
In short, they essentially own the content that Hallmark runs on its network. Nice.
But you'll say, "Todd, they reported a loss last year!!" Back to 10-K
We have incurred net losses in the past largely due to amortization of film production costs, inclusive of impairment charges, and interest expense on our outstanding indebtedness. During the year ended December 31, 2008, a non-cash impairment charge of $59.8 million with respect to goodwill was recorded as the result of our stock price declining significantly to a level implying a market capitalization below our book value.
Without the goodwill charge the company earned NI of $16 million or $1.23 a share. What about that book value? As of 12/31 it stood at $7.85 a share vs a $1.89 a share stock price today or you could say the company sells at 24% of its book value.
Disclosure: Will be going long RHI