A Stern Warning

By Daniel Kadlec

I tuned in to the Howard Stern show two weeks ago. Don't ask, please. Anyway, the bad boy of radio was engaged in some sort of bimbo quiz show in which one judge was mentally ill and, prompted by Stern, trying in vain to elaborate on his scoring. Such "humor" is old hat for Stern. What caught my ear was that this ratings king and cash cow for Infinity Broadcasting was speaking of plans to retire. It was just days before Infinity sold 140 million shares to the public for $3 billion, and raises interesting questions for stockholders--not least: How much is an on-air star like Stern worth? It also raises disclosure issues.

First, what is Stern's value as a corporate asset? Not much, according to CBS, which bought Infinity in 1996 and sold 17% of it in a public offering earlier this month. Nowhere is Stern mentioned in a 183-page prospectus that is supposed to be the best source for valuing a newly traded stock. The bottom line is that Stern's continued success "is not a material issue" to the health of Infinity, says CBS spokesman Gil Schwartz. O.K. We all know that Stern's image is larger than his impact. Yet he's easily the company's most visible asset, and he's talking about retiring. And not one official will say what he's worth. Not at CBS, the parent. Not at Merrill Lynch, the underwriter. Not Stern himself, whose sidekicks block any call not having to do with body parts. And none will say how long he's under contract, even though that question came up during Infinity's "road show," where big investors get to ask such things.

He appears to be tied up for two more years. The best I could deduce about his revenue impact is that it's on the order of $100 million a year. Clearly, Infinity's 161 radio stations and other assets (including radio jock Don Imus), with a total market value of about $19 billion, overwhelm Stern. Still, if my estimate is close, Stern has a hand in 5% of Infinity's $1.9 billion in annual revenue. That may not be "material" legally, but it's information an investor ought to be able to get. By the way, the prospectus neglects to warn of a possible hit on Infinity's outdoor-advertising business stemming from a tobacco settlement limiting billboard cigarette ads. CBS takes the rosy view that new clients will sign up at higher rates than tobacco companies, which had long-term leases. So it's a good thing. But until that actually happens, the lost tobacco revenue is a risk investors should be told about.

Legal guidelines for what must be in a prospectus are vague in these areas. That said, most are still jammed with pertinent information. And where disclosure is lacking, there's typically a tipoff that you should check further--on the Internet, in the annual report or with a broker or analyst. In Infinity's case, the prospectus briefly alludes to the risk of losing "on-air personalities" with "significant loyal audiences."

The biggest problem with most prospectuses is that most people don't read them, and those who do discount the "risk factors" as the overprotective drivel of some lawyer. How else to explain soaring Internet IPOs despite pages spelling out potentially fatal risks? Addressing this issue in his 1996 IPO of Berkshire Hathaway B shares, Warren Buffett in bold letters urged all to read the material and "ignore anyone telling you that these statements are boiler plate or unimportant." That's a start. But be ready to check further.

See time.com/personal for more on Infinity Broadcasting and disclosure issues. You can e-mail Dan at [email protected]