IPO Watch: RHI Entertainment

Ann C. Logue | Jun 17, 2008 6:20am EDT | Comment

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www.rhitv.com
(Nasdaq:RHIE)
Scheduled for the week of June 16
$212.5 million estimated proceeds
$380.8 million estimated post-money valuation

It’s a story ripped from the headlines: scrappy company faces down worst IPO market in years and succeeds beyond its wildest dreams in a heartwarming tale of triumph over long odds. You’ll laugh, you’ll cry, but will you make money? If you watch Lifetime, you know RHI Entertainment. The company produces made-for-TV movies and miniseries, and then sells them on DVD after their network runs. It was originally owned by Hallmark, of greeting-card fame, and known as Hallmark Entertainment. In 2006, it was acquired by an investment group led by a father and son television production team, Robert Halmi, Sr. and Robert Halmi, Jr. They also acquired domestic DVD rights to the Hallmark Channel’s library, and they continue to make movies for the Hallmark Channel.

The company has since branched out beyond the Hallmark Channel to make and distribute programs for a range of other television outlets including pay-per-view and direct-to-video options. It plans to have 40 new productions in 2008 alone. The value of the deal is in the assets, though, because RHI is losing money on a net income and cash flow from operating activities basis; it had positive EBITDA in 2007 but not in 2006. Much of this is due to interest expense, $38.3 million in 2007, which should be eliminated after this transaction. With the interest expense gone, RHI should post solid profits. Like other entertainment companies, RHI is allowed to capitalize its production costs, though, which may lead to some overstatement of profits. The business has to be valued on a cash-flow basis by an investor who feels comfortable with that.

The transaction isn’t perfectly straightforward, either. RHI Entertainment LLC, the company that owns the assets of the business, is owned by RHI Entertainment Holdings II. After the IPO, that company will be owned 55.8% by the public shareholders of RHI Entertainment Inc. and 44.2% by KRH Investments, which in turned is owned by Robert Halmi Jr. and Kelso, a private equity firm.

In a hot IPO market, a company with valuable assets and strong visible cash flow prospects would be able to come public with no problems. But in this market, the complications might put off enough investors to make this a tough sell.

Upcoming IPOs

Britannia Bulk Holdings (NYSE:DWT); www.britbulk.com; scheduled for week of June 16; $149.4 million estimated proceeds; $488.8 million estimated post-money valuation: Have dry-bulk shippers replaced SPACs as the Next Big Thing? Safe Bulkers (NYSE:SB) completed its IPO on May 28, and by June 4, Britannia Bulk Holdings filed its IPO with an expected completion date of June 16. Dry bulk is uniform cargo that can be stored in loose piles such as grain or iron ore. Britannia Bulk Holdings operates 13 dry-bulk vessels, five of which are ice-class, which means that they are capable of navigating the north Atlantic. The company also operates nine other ice-class cargo ships. The company leases other ships as necessary. It generated $46 million in profit on $566.6 million in revenue last year.

Consonus Technologies (Nasdaq:DCTI); www.consonus.com; scheduled for week of June 16; $27 million estimated proceeds; $58.4 million estimated post-money valuation: This is the Hillary Clinton of IPOs, not ready to concede defeat no matter what the numbers show. On May 4, 2007, Consonus filed for an IPO of 6 million shares priced between $7 and $9 each. On June 10, 2008 (yes, more than a year later) it announced that it was changing the terms to 3 million shares priced between $8 and $10 each. The company provides data center and other IT services. It had $104.2 million in revenue and lost $5.1 million in revenue in 2007, the latest in a string of losses. Sure, some of that is from such non-cash charges as depreciation, but not much.