• by Erik Sass  @eriksass1, March 8, 2006

In a report upgrading Sirius stock from an unfavorable "sell" to middling "neutral," Banc of America analyst Jonathan Jacoby predicted that punitive damages were unlikely to result from the high-profile lawsuit brought by CBS against Stern for advertising his upcoming move to Sirius with CBS air time.

With the disclaimer that "[w]e are not lawyers and will not attempt to handicap the probability of CBS succeeding with its lawsuit or extracting a settlement," Jacoby and co-analysts Gunbir Sethi and Joe Arns nonetheless wrote that "our legal contacts inform us that it could be challenging for CBS Radio to win punitive damages from Sirius in this case given the relatively high standards for such awards under New York State law."

According to Jacoby, legal analysts say punitive damages would depend on CBS proving that Sirius displayed "moral culpability [that] transcend[ed] simple carelessness" as well as "public interest harm"--meaning harm to the public at large, not just CBS.

Further, in upgrading Sirius' investment rating, Jacoby noted that its stock had fallen by $0.17 a share immediately following news of the CBS-Sirius lawsuit--meaning that investors had already discounted approximately $450 million in potential liability from Sirius' value.

Still, the Banc of America report was decidedly mixed. On the one hand, Jacoby and his colleagues affirmed that they "remain positive on the satellite radio industry" overall, noting that "consumer demand is just beginning to grow" as "Sirius and XM added a combined 4.9 million net subscribers" in 2005. Further, the analysts "forecast industry net adds of over 6 million in 2006."

But at the same time, both satellite radio broadcasters are bedeviled by serious financial difficulties--mostly due to high costs associated with recruiting new subscribers. Sirius and XM both recently posted financial statements for 2005 that showed costs far exceeding revenue; for example, XM spent about $100 million just to counter Sirius' no-holds-barred blitz for Stern's arrival, but the big outlay produced relatively meager results.

Thus, Banc of America's evaluation of both companies was lukewarm at best, favoring XM over Sirius for the immediate future because XM has made moves to discipline its costs and will benefit from positive coverage with the introduction of Oprah Winfrey's signature radio channel toward the end of 2006.