Satellite Radio Playground

By Brian Newman Rayl

In a filing with the Supreme Court of the State of New York yesterday, One Twelve, Inc. (Howard Stern’s production company) and Don Buchwald (Howard Stern’s agent) have filed a lawsuit against Sirius XM Radio (NASDAQ:SIRI). While Howard Stern is not officially named as a plaintiff in the proceedings, according to the New York Division of Corporations, Stern is listed as the “Chairman or Chief Executive Officer” of One Twelve, Inc. and would presumably stand to benefit substantially if this lawsuit is upheld.

The lawsuit regards contractual obligations to award bonuses to One Twelve, Inc. and Don Buchwald based on the company surpassing certain internal subscriber projections. The plaintiffs allege that while these subscriber numbers were indeed surpassed, Sirius XM never made good on their contractual obligations. Additionally, the filing states that Sirius was required to pay out a bonus if these internal projections were exceeded by two million subscribers, with additional bonuses paid out for each two million thereafter. According to paragraph 40 in the filing, the internal subscriber projections used to determine if a bonus was going to paid out were as follows:

• 2006 – 3,707,000
• 2007 – 5,291,000
• 2008 – 7,192,000
• 2009 – 9,284,600
• 2010 – 12,112,400

The payments for 2006 are not at issue in this suit. In January of 2006, Sirius issued a shelf registration for 34,375,000 shares for One Twelve and Buchwald. On January 10th 2006, the stock traded at a high of $6.63, making this bonus package worth approximately $228 million. At the end of 2006, the total ending subscriber count for Sirius was 6,024,555 and One Twelve and Buchwald were once again paid. On January 9th, 2007, Sirius filed a shelf registration of 22,058,824 shares for One Twelve and Buchwald worth ~$83.3 million at the time.

Throughout 2007, Sirius added more than 3 million subscribers, amassing a total of 8,321,785 subscribers. This topped the 2 million subscribers over the internal projections, but One Twelve and Buchwald were seemingly never compensated for this year.

The heart of the lawsuit concerns the merger of Sirius and XM. In February 2007, Sirius and XM announced its intentions to merge and consummated that merger in July of 2008. The plaintiffs claim that the completion of the merger caused the combined Sirius XM to have over 18.5 million subscribers, reaching just over 19 million by the end of 2008. According to the claims in the lawsuit, this caused Sirius XM to exceed the original internal forecast of 7.192 million by over 10 million subscribers. The plaintiffs state that this would trigger the bonus structure for each 2 million increment over the 7.192 number to be payable. In 2009, Sirius XM ended the year with 18,772,758 subscribers, or 8 million over the internal projection. In 2010, the company ended the year with 20,190,964 subscribers, again exceeding 8 million over the internal projections in the original contract.

The point of contention apparently comes down to if XM subscribers should be counted towards “total subscribers” as defined in the contract. According to allegations in the lawsuit, Stern and Buchwald had foreseen the possibility of a merger between Sirius and XM and addressed this in their contract negotiations.

30. Indeed, throughout the contract negotiations, Buchwald and Stern raised
the possibility that Sirius and XM might merge, bringing both company’s subscribers together under one entity. The parties added a separate provision to Stern’s contract to account for the possibility of a merger and permit the broadcast of the Howard Stern Show to the combined subscribers of the surviving entity. Yet, even though the parties were discussing the possibility of a merger in this separate context, Sirius did not seek to exclude from its subscriber targets any additional subscribers that might come to Sirius as a result of such a merger or acquisition.

– Court Filing, One Twelve Inc. and Don Buchwald vs Sirius XM Radio Inc.

While Sirius merged with XM in a “merger of equals” in 2008, the XMSR subsidiary was never merged with Sirius until January 12th of 2011. Through the end of 2010, Sirius XM reported the two as separate operating units and separated the subscriber numbers accordingly.

The decision will likely come down to if the XMSR subsidiary will be considered an independently functioning subsidiary or, if in fact, the two are considered merged and thus the subscriber counts merged as well. It is One Twelve and Buchwald’s claim that the language of the contract stipulated that the bonuses were to be based off of “total subscribers” and the claim further allege that XM should be counted in the “total subscriber” numbers because if Stern had not signed on, Sirius would have never been in a position to merge or acquire XM, thus those subscribers should be attributable to Stern himself.

To recap the bonuses paid, the Plaintiffs were paid ~$228 million at the beginning of 2006, and ~83 million in 2007. There was no payment paid for 2008, even though the subscriber numbers exceeded the threshold for the bonus, and again in 2009 and 2010 no payments were made based on Sirius subscriber numbers alone. The lawsuit states that the incentives to be paid were “stock awards,” but do not clarify if that is a set number of shares or a specific dollar value in shares. It also does not specify the method of calculation of escalating bonuses for greater than 2 million subscribers added. This makes it difficult to determine what the actual potential judgment could be if the Supreme Court of New York finds in favor of the plaintiffs.

28. Sirius also agreed that One Twelve would receive additional stock awards
if Sirius exceeded its internal estimates by multiples of 2 million subscribers. For each additional 2 million subscribers up to 10 million subscribers, One Twelve would receive an additional stock award. Thus, One Twelve was entitled to a second stock award if the total number of Sirius subscribers exceeded the internal estimate in any given year by 4 million subscribers, a third stock award if the total number of Sirius subscribers exceeded the internal estimate in any given year by 6 million subscribers, a fourth stock award if the total number of
Sirius subscribers exceeded the internal estimate in any given year by 8 million subscribers, and a fifth stock award if the total number of Sirius subscribers exceeded the internal estimate in any given year by 10 million subscribers.

– Court Filing, One Twelve Inc and Don Buchwald vs Sirius XM Radio Inc.

Making an assumption that the ~$83 million number is set, and the amount is multiplied by each step of the escalation, Sirius XM could theoretically be ordered to pay $83 million for 2007, $415 million for 2008, and $332 million for each 2009 and 2010, bringing the total to $1.162 billion plus damages and interests. Again, this number is simply speculation as there is no one other than Sirius XM and the plaintiffs (and now the Supreme Court of New York) that know exactly what the contract states.

There are many more nuances to this story that need to be discussed and considered. This developing story will be discussed extensively on Playground Radio tonight at 8:00PM EST, in addition to a live interview with Knight Libertas Telecom and Media analyst Leah Pilla.

Disclaimer: Long SIRI
Contact the author: Newman@SatelliteRadioPlayground.com

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