Crikey

They are a generous lot at regional Pay TV business, Austar; they believe so much in the company that now the shares have weakened, they are making the first in a controversial long term incentive program next Tuesday in cash.

That’s despite Austar revealing yesterday it had ended its share buyback scheme “to focus on cash”. Instead of giving the 25 top executives involved in the plan shares worth $10.6 million, they will get around $424,000 each, again on September 30 and twice a year next year and in 2011. Six payments in all for a total of $63 million would be made.

Here’s what Austar told the ASX yesterday:

Austar United Communications (“AUSTAR”, ASX: AUN) today announced that it had concluded its current share buy-back program. AUSTAR Chief Executive Office, Mr John Porter, noted that since this program commenced in December 2008, the Company has bought back and cancelled 21,829,961 shares at the cost of $17,030,981.54. In the period May 2008 to date, the company has bought back and cancelled over 68 million shares at a cost of just over 72 million dollars.

Mr Porter said: “It has made sense for the Company to take advantage of weakness in the market which has seen AUSTAR’s share price lower than what we believe to be reasonable value.”

“While we still believe the stock to be underpriced, it is an appropriate time to end this current program and focus on cash preservation for future opportunities including potential amortisation of the first tranche of our senior debt facility in late 2011.”

Mr Porter also noted that in light of continuing weakness in the Company’s share price, the Company’s Board had decided to pay the first of six possible payments under the Company’s long term incentive plan, due on March 31, in cash, rather than shares.

Austar shares have fallen from more than $1.30 in May of last year to 73 cents yesterday, despite the support of the share buyback scheme. The long term incentive program was explained in this way in the 2008 annual profit statement and accounts lodged with the ASX.

Under the “2007 Long Term Incentive Plan” 25 Senior Executives are entitled to an award calculated on a two year performance period ending in December 2008 and vesting in biannual tranches over the subsequent 3 year service period to September 2011.

For the award to vest, the Consolidated entity had to achieve a Compound Annual Growth Rate (CAGR) of at least 15% in Earnings before Interest, Taxation, Depreciation and Amortisation (“EBITDA”) over the 2006 to 2008 performance period. The maximum award vested as the Consolidated entity exceeded the 20% upper CAGR target by achieving a CAGR of 21.4% from 2006-2008.

Each of the six tranches payable from 31 March 2009 can be settled either in un-restricted shares or cash at the option of the Company. The plan is expected to be paid out in cash or unrestricted shares, converted at the market price on each vesting date.

The 2007 Long Term Incentive Plan is accounted for as an equity settled share based payment under AASB 2 “Share Based Payment”. The fair value was initially estimated at the date the participants were notified on 2 May 2007.

This estimate of $38.5m in 2007 was based on achieving the maximum 20% EBITDA CAGR target, estimated staff turnover of senior executives and a risk free rate of 6.06%.

The expected value is reassessed each reporting period and due to a reduction in the expected turnover of senior executives in the current economic environment, this has increased to $45.4m which is expensed in the income statement on a time proportionate basis over the vesting periods for each tranche.

Should all 25 participants remain employed and meet plan conditions until 30 September 2011 the maximum nominal value of the plan is $63.8m, which based on grant date fair value would result in a maximum expense of $53.0m over this period.”

So all the guys and gals in the 25 top executives are hanging around to get their hands on more than $2.5 million, on top of what they will earn in the meantime. But it is a bit rich that just because the company’s share price tanks, that payments should be made in cash. Cash is of higher value now with Austar already warning of a tougher year ahead with rising churn and falling subscriber numbers expected because of the recession.

The share buyback failed to hold the share price up: is this what it was there for, to bolster the price to enable executives to get a nice swag of shares, with the fallback the pot of cash if the shares weakened?

Austar is controlled by John Malone’s Liberty group of companies. The share buyback has benefitted Malone and Liberty more than anyone: it hasn’t participated and has seen its shareholding rise as a proportion of the total issued capital. The Malone stake is now well over 52%.

Along with News Corp, Austar and Consolidated Media Holdings are the pick of Australian analysts among Australian media stocks. So far all have been poor performers. The scorned Fairfax has around 20% of gains from its low of 79.5 cents set in the wake of its recent capital raising. Austar’s price has fallen by around 10% in the same time.