Lehman says:
Recent Stern Stock Grant Part of Initial Contract, Not Incremental. We believe there has been some market confusion over Sirius’s recent grant of 34.4MM shares to Howard Stern and his agent. This is not incremental stock, but rather the stock component of Stern’s original, $500MM contract, which called for $400MM in cash and 34.4MM shares of SIRI stock, valued at approximately $100MM at the time the contract was signed in October 2004. The company’s net add performance to date has been sufficient to trigger the early issuance of the stock – had subscriber growth not been as robust, the issuance could have been delayed until the end of the contract at YE 2010. As the charge for this stock is non-cash, the issuance does not directly affect our valuation, although we do include the shares in our sharecount. It remains unclear whether Sirius plans to account for this issuance through a one-time charge, or by spreading the cost out over the full term of Stern’s contract. We would favor the latter method, and have incorporated it into our estimates.
Stern Likely to Make Partial Sale For Tax Reasons – Would Not Be Reported. This stock grant is a taxable event for Stern and his agent, and we believe they are likely to sell a portion of their shares in order to meet their tax obligations, which could be as high as $80-100MM. Sirius registered the stock on January 11th, and Stern is now free to sell at any time. We would not expect a tax-driven sale to be materially disruptive to the market, however, as SIRI already trades nearly 50MM shares on an average day, making it relatively easy to dispose of even a large position over a modest span of time. We note that Apollo was able to sell 21MM shares in 4Q05 without causing any material market disruption. We are unlikely to learn when or if Stern or his manager sell portions of their stakes, as Stern is not a 5%
holder. In addition, Stern is not technically a Sirius employee, but rather an employee of his production company, which has a contract with Sirius. As a result, he would not need to report sales due to insider status.
Potential Incremental Stock Grants to Stern, Impact Unlikely To Be Material. As part of his contract with Sirius, Howard Stern may be entitled to additional equity grants, based on certain subscriber targets. These targets have not been released, nor have the exact terms of the stock that would be granted to Stern in the event they are reached. We believe the grants are structured on a per subscriber basis, and are set in dollar, rather than share, terms.
As an example, Stern might receive $30 in stock for each additional subscriber beyond a given target by YE 2007. The number of shares issued, then, would be $30 divided by the share price at the time of the grant.
While we are somewhat concerned about the open-ended and unknown nature of these potential grants, even a very large grant, reflecting large per-sub grants and low targets, would not sharply affect our Sirius valuation, given the very large number of shares already outstanding. For illustration purposes, we assume a $6 stock price, a $100 per subscriber share grant to Stern, and a total of 2MM subscribers beyond the target, roughly equal to the upward revision in consensus estimates for Sirius’s YE 2010 subscribers since the Stern contract was signed. This would imply an incremental 33MM shares, or just a 2% increase in the fully diluted shares outstanding.
Estimate Revisions
Raising 1Q06 Net Add Estimate Based On Very Strong 4Q05 Performance – Expect 6.16MM Subs at YE 2006E. We are raising our 1Q06E net add estimate to 817k from 655k, reflecting continued strong retail demand, driven in substantial part by terrestrial Stern listeners switching, now that his Sirius show has formally launched. Our new estimate reflects a 51% share of total net additions, and a 63% share of retail net additions. We now expect Sirius to add 2.85MM subscribers in 2006E, ending the year with 6.16MM subscribers, modestly above the company’s 6MM subscriber guidance. |
