Howard Stern vs. Sirius XM – Let the Games begin

n March 22 Howard Stern’s production company filed a lawsuit against his employer, Sirius XM Radio, Inc. seeking payment of what could be determined to be as much as hundreds of millions of dollars. In his lawsuit Stern alleges that Sirius violated his previous contract with by failing to pay bonuses tied to the number of Sirius subscribers. The timing of the lawsuit is somewhat curious because Stern had, only a few months earlier, signed a new contract with Sirius after the expiration of his initial contract. Stern has been broadcasting on Sirius satellite radio since 2006 after signing a contract with them in 2004 following a tremendously successful career on terrestrial radio. Stern’s contract with terrestrial radio company Infinity Broadcasting Corporation (now CBS Radio) expired at the end of 2005.

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story by Talkers Magazine

written by Steven J.J. Weisman
stevenjjweisman@aol.com
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In order to understand the lawsuit it is important to review the history of Stern’s relationship with Sirius. Satellite radio was in its infancy in 2004 when Stern signed with Sirius after being courted by both Sirius and its then sole satellite radio competitor, XM Satellite Radio. In the year prior to Stern joining Sirius, its subscribers numbered less than 700,000 while XM had 2.5 million subscribers. Upon the announcement in October of 2004 that Stern would be broadcasting on Sirius beginning in 2006, Sirius’ stock went up a whopping 15%. After a year of trumpeting his journey to Sirius radio, Howard Stern had his initial broadcast on Sirius in January of 2006. By this time the number of subscribers to Sirius had risen to well over three million.

The bidding war between XM and Sirius for the services of Howard Stern had been extremely competitive with Stern able to leverage a five-year contract estimated to have been worth as much as $500 million in cash and stock. A major provision of Stern’s 2004 contract with Sirius was a bonus provision by which Sirius would make substantial stock payments to Stern if Sirius exceeded its subscriber estimates in any year by more than two million subscribers. Following the first year of the contract, Sirius paid the stock bonus payment to Stern’s production company based upon its estimates of subscribers at 3,707,000 and the number of actual subscribers by the end of 2006 reaching more than six million. Since that time no bonuses were paid under this provision of Stern’s contract even though the number of new subscribers in 2007 exceeded Sirius’ estimates by more than three million, bringing the total Sirius subscribers at that time to more than eight million.

Despite the success in the numbers of subscribers the viability of satellite radio as a business was seriously in doubt. In 2008, after approval by the United States Justice Department and the FCC despite stiff opposition from those in terrestrial radio, a merger of Sirius Satellite Radio and XM Radio was approved and consummated. Suddenly the number of subscribers to the new entity, Sirius XM Radio Inc. rose dramatically to 18.5 million subscribers and therein lays the crux of Stern’s dispute with Sirius. Stern alleges that the new subscribers attained through the merger of the companies, which went on to reach 20 million subscribers in 2010, should be counted toward the bonus provisions of his contract while Sirius denies this contention. Prior to the merger, Sirius’ subscribers numbered 8.3 million. After the merger this number leaped to 18.5 million subscribers.

Despite this apparent success, the satellite business model was still far from viable and by the end of 2008 Sirius was seriously considering declaring bankruptcy following the drop of its stock in value to as low as 12 cents per share in 2008. According to Stern’s complaint, he decided not to demand payment of bonuses owed him at that time due to the financial precariousness of the company and not wanting to jeopardize the company’s ability to obtain the necessary financing to remain in existence. By 2010, Liberty Media came to the financial rescue of Sirius and the stock value increased. As of the date of the writing of this article the stock is now valued at $1.71 per share.

According to Stern’s lawsuit, in March of 2010 his agent had asked Sirius general counsel Patrick Donnelly why the bonuses had not been paid for 2008 and 2009. Donnelly reportedly told Stern’s agent that it was the position of Sirius that the XM subscribers were not to be considered in the determination of the number of Sirius subscriptions for purposes of Stern’s contract’s bonus provisions. Despite this rather substantial disagreement, in December of 2010 Stern and Sirius signed a new five-year contract that did not deal with the bonuses alleged to be due from the previous contract.

The potential fallout from the lawsuit could be devastating to Sirius XM. The very next day after the lawsuit was filed a number of stock analysts downgraded the company’s stock. The possible financial consequences to Sirius XM could reach into the hundreds of millions of dollars if Stern were to be successful in his lawsuit. Adding more fuel to the fire, if the allegations contained in Stern’s lawsuit were to be proven, Sirius could be liable in a class action that could be brought on behalf of its stockholders against Sirius for failing to disclose to shareholders the substantial risk presented by Stern’s claims.

With so much at stake here for both Stern and Sirius and with so much to lose by a prolonged legal battle that would only serve to further depress the value of the stock that is a major part of Stern’s compensation, it would seem in the best interests of all concerned to ultimately work out a settlement. How long such a settlement might take to arrive at, however, is anyone’s guess. So stay tuned.