HSN Grants Barry Diller Another Big Stock-Option Package

Barry Diller received another big stock-option package from the media company he runs, as HSN Inc. granted him the right to acquire 4.75 million common shares through 2007.

The package will generate about $292 million in profit for Diller if HSN shares appreciate 10% annually during the 10-year period, according to a proxy statement recently filed with the Securities and Exchange Commission. These figures assume Diller holds all of the options until 2007.

Diller’s options may reflect the large stock package that Walt Disney Co. granted to Chairman Michael D. Eisner, according to one money manager. By awarding Eisner 8 million options last year, Disney may have raised pay standards for all entertainment and media executives.

“The problem is, in industries like that you have people like Michael Eisner setting such a high standard for gross overcompensation,” said Alan B. Snyder, president of Snyder Capital Management, a San Francisco money manager that owned about 1.28 million HSN shares as of Sept. 30. “It’s hard to argue that any smaller level” is excessive, Snyder said.

Eisner’s option package made headlines after compensation expert Graef Crystal said the award could eventually be worth $771 million.

Home Shopping Network, the television retailer of jewelry and other merchandise, said in an earlier SEC filing that it awarded Diller 13.4 million options when he became chairman of the company in November 1995. Silver King Communications Inc., a company controlled by Diller, purchased Home Shopping Network in December 1996, then changed its name to HSN. Diller’s 13.4 million Home Shopping options were converted into roughly 6 million HSN options.

Diller doesn’t draw a salary for running HSN. The St. Petersburg, Fla., company granted him the latest option package on Oct. 19, one day before announcing it would buy Universal Studios’ domestic television business from Seagram Co. for about $4.08 billion.

The October award entitles Diller to buy 4.75 million common shares at $38.63 each through October 2007. Options for 25% of the shares can be exercised beginning Oct. 19 of this year, with the remaining options set to vest in equal installments in 1999, 2000 and 2001.

In general, executives who receive options can use them to buy company shares in the future at a preset price. The holder profits if the option price is lower than the market price at the time of exercise.

HSN shares currently trade at $49.38, which would give Diller a profit of more than $50 million if he could exercise all of the options. The shares were at $23 in December 1996, when Silver King completed its acquisition of Home Shopping Network and changed its name to HSN.

“He has done a fantastic job at the company, so he deserves to be well-compensated,” said Snyder, whose firm manages funds for charitable institutions, college and university endowments and corporate pension funds. “It is just a question of what is well-compensated and what is overcompensated.”

Another concern for shareholders is the dilution of earnings per share, a figure that Wall Street relies on to help set a company’s stock price. Earnings-per-share calculations, when made on a fully diluted basis, include options and are therefore affected by big stock-compensation packages.

The 4.75 million options awarded to Diller equal about 10.9% of the 43.66 million shares outstanding on Nov. 3, according to HSN’s latest quarterly report. However, HSN will actually have as many as 160 million shares outstanding, not counting options, after the purchase of the Universal television assets and several other transactions, thereby reducing the dilution from Diller’s package. These transactions include a $300-million investment in the combined company by Liberty Media Group.