Nothing boffo about TV-movie producer RHI's stock offering

Much of the pulp TV programming that RHI Entertainment Inc. churns out is a lampooner’s dream. "Killer Wave." "Blood Monkey." "Black Swarm." You get the picture.

That didn’t stop investors from handing the New York-based production company $189 million in its initial public stock offering on Wednesday.

But by the end of the stock’s first session of trading, the people who bought in may have been feeling like one of the hapless victims in RHI’s horror fare: "What was I thinking opening that door?"

The deal was priced at $14 a share late Tuesday, well below the $16-to-$18 range RHI hoped to get. But even $14 turned out to be too high: The stock immediately fell as trading began Wednesday, dropped as low as $13 and closed at $13.50. An instant discount is never a good sign for a new offering.

RHI is the production vehicle of the Halmi family -- Robert Halmi Jr., 51, and his father Robert Sr., 84. Their niches are made-for-TV movies and TV miniseries, some of which have been critical successes (the Western "Lonesome Dove" in 1989, for one). RHI’s 2007 science fiction series "Tin Man," a reimagining of "The Wizard of Oz," was the biggest ratings hit in the Sci Fi channel’s history.

A lot of what the Halmis have produced over the last 30 years, however, has just filled content space on the networks and cable. Critics be damned, the Halmis love to put their own stamp on remakes of the classics: "Moby Dick," for instance, and "Gulliver’s Travels."

Nothing wrong with that. Except that RHI, in its current incarnation, is bleeding red ink. It needed the IPO to help pay off crushing debt, not to directly fund a new era of Halmi productions. . . .

That should have been the only warning investors needed, says Ben Holmes, head of IPO research firm morningnotes.com in Boulder, Colo.

RHI "can’t access the capital markets any other way than a public offering," Holmes said.

He figures the stock’s buyers had to be small investors enthralled with the idea of owning a movie company. "It’s very clear [the shares] went to retail investors because the smart money wouldn’t touch this," he said.

Here’s the quick history of RHI: It was a public company in the early 1990s until it was bought out by Hallmark Cards in 1994. The Halmis stayed aboard with Hallmark, pumping out programming. In this decade they’ve claimed nearly half the market for TV miniseries, many for the Hallmark Channel.

In January 2006 Robert Halmi Jr. and other investors bought the company back from Hallmark. But in borrowing to fund the buyout, "They leveraged all the value out of the company," Holmes says.

Long-term debt was $675 million as of March 31. The interest bill in 2007 was $51.5 million -- for a company with $232 million in revenue. A loan an RHI-affiliated company just took out in May bears the sky-high interest rate of 19%.

Robert Jr., in his roadshow pitch to investors (30 minutes of which the company put on the Web), cast RHI as a cost-conscious production house that makes TV programming relatively inexpensively and is poised to reap long-term rewards from its growing content library, as its TV movies and miniseries air again and again.

But when does the bottom line turn black? Good question. It can be black right now, depending on your accounting.

RHI’s actual loss last year was $22.6 million. Ah, but RHI prefers that investors look at "adjusted EBITDA" -- in this case, earnings "before interest expense, income tax, depreciation of fixed assets, amortization of film production costs (including impairment charge), goodwill impairment charge, amortization of intangible assets and any loss on extinguishment of debt and financing-related expenses, reduced by our capitalized film production costs net of changes in accrued film production costs during the applicable period."

By that contorted measure, the pro forma bottom line in 2007 was a positive $35.3 million.

If that’s way too much to ask an average investor to digest, it gets worse: I dare you to try to decipher the ownership structure of the company.

RHI, basically, is a shell that owns 56% of the real production business. Robert Jr. and other investors own the rest via a separate entity, KRH Investments. And as the offering prospectus notes, "KRH or its affiliates may have interests that differ from those of our public stockholders."

You hate when that happens.

Maybe this will all work out well for RHI’s new shareholders. But this IPO has the ring of an old line that small investors don’t ask enough when Wall Street, or Hollywood, comes calling: "If this is such a great deal, how come you want to cut me into it?"

Photo: The cast of the RHI miniseries "Tin Man."