Months after betting on Internet acquisition About.com and seeing its stock tumble, Primedia has made another bet: that the value of its shares will rebound in the next seven months, in time to cover a guaranteed payout to one of its executives.
When the deal for About.com was reached in October, Primedia agreed to protect Scott Kurnit, About's CEO and now Primedia's chief Internet officer, from any negative financial repercussions by ensuring that Kurnit would receive at least $25 million for the remaining 1,429,344 shares of Primedia common stock he's allowed to sell this year. (The guarantee, which was contained in a clause in the acquisition agreement, is referred to as the "Kurnit Shortfall Payment" in a filing last week with the Securities and Exchange Commission.)
Considering that the company's stock was trading at about $5.70 Monday afternoon, the shortfall would be nearly $17 million, and that would mean a big, embarrassing, unanticipated and unwanted expense this year for a company increasingly intent on short-term results.
But Primedia has a hedge. The company, in effect, placed a bet with an undisclosed "financial institution" that will buy Kurnit's shares at the guaranteed minimum price. That institution will then either sell those shares on Feb. 28, 2002 — the first anniversary of the Primedia/About merger's closing — or another, earlier, date approved by Primedia.
The wager is this: If Primedia's stock price hasn't risen far enough to make those shares worth $26.8 million — Kurnit's guaranteed payout plus the fee to the institution — then Primedia makes up the difference. With its stock price currently so low, the thinking must be that there's only one direction it can go. (Primedia owns 49 percent of Inside.com's parent company, Brill Media Holdings.)
Kurnit received roughly 2.3 shares of Primedia stock for 1 of About.com's as part of the merger, turning the largest shareholder of About stock into the second-largest among Primedia's officers. At the time of the merger's closing, Kurnit owned 5,259,178 shares, plus options and restricted shares. Apparently to prevent Kurnit from dumping his stock on the open market and further depressing the company's stock price, Primedia had it written into his contract at the start of the merger that he could sell only a third of his new Primedia holdings before the first anniversary of the merger's closing. The 1.4 million he's selling to the unnamed financial institution — plus 210,000 shares sold in May that are not part of this hedge move — constitute this year's quota.
"The quid pro quo was, we used an assumed price in the arrangement of $15.25 per share," explains Beverly Chell, Primedia's vice chairman and general counsel, referring to the price Primedia traded at on the day the merger was announced. "We promised him that for the shares he sold — the one-third in the first year — if he didn't sell [at $15.25] we would make up the difference. That's the shortfall. What we've got now is a financial institution to do a hedge. We believe the stock will be higher next February. We're betting if the financial institution pays him now, and we pay them in February, we're going to save money."
Asked if the hedge would delay the expense into next year, instead of having the Kurnit payout show up now, risking a hefty charge this quarter, Chell says: "No, no, not at all." She adds, "The only thing that would be booked is [the $1.8 million] fee. The rest was taken care of as part of the merger — it's all goodwill."
Kurnit says he's looking to sell now because, "I have a right to do it only in the first year. Five months into the deal as a board member, I'm locked up. As an insider, when you get the chance to sell, you almost need to."
