Sumner Redstone and his holding companies have sold their shares in Midway Games Inc. for less than a penny each, capping the media mogul’s aggressive investment in the troubled video game maker that ended up costing him hundreds of millions of dollars.
The $100,000 in proceeds from the sale of Redstone’s 87.2% stake to investor Mark Thomas will not help pay down his family company’s debt of $1.6 billion. The transaction was instead designed to produce a benefit for the company, National Amusements Inc., by reducing its taxable income in the current year.
According to a filing with the Securities and Exchange Commission, Redstone and his companies, National Amusements and Sumco Inc., sold their holdings in the Chicago-based game company Friday for $0.0012 per share.
At the time of the sale, Midway’s stock closed at 38 cents a share, valuing Redstone’s stake at $30.5 million. Over the years, Redstone poured hundred of millions of dollars into Midway even though the company has long been considered a laggard in the video game business.
Little is known about Thomas or his company, Acquisition Holdings Subsidiary, other than he apparently has had no prior dealings in the industry.
Peter Kolevzon, an attorney at Kramer Levin Naftalis & Frankel, which is representing Thomas in the transaction, said his client “is a private investor who wants to remain private.” Kolevzon said Thomas intended to be a passive investor and did not plan to be on Midway’s board or get involved in the management of the company.
“Redstone is giving Midway away,” said Michael Pachter, an analyst with Wedbush Morgan Securities. “That’s crazy.”
Midway’s shares lost 5 cents, or 13%, Monday to close at 33 cents, giving the company a valuation of $30.4 million.
At first blush, it would appear that Thomas is getting a $30-million company for $100,000. But there’s more to it, Pachter said.
Midway owns several valuable game franchises, including Mortal Kombat and Blitz. It also had $10.5 million in cash and $21.6 million in receivables as of Sept. 30. As part of the deal, Thomas gets another asset: a $70-million debt that Midway once owed to Redstone’s National Amusements. Midway’s payments on that loan will now go to Thomas.
On the other hand, Midway has $150 million in outstanding loans, not including the $70 million it will owe Thomas. It also has a payroll of about 900 workers that it is struggling to meet.
Last quarter, the company lost nearly $76 million on $51.4 million in revenue.
“The company is cash-flow negative,” Pachter said. “So unless someone sinks more working capital into it, all [Thomas] can do is liquidate it and hope there’s more than $100,000 left at the end of the day.”
National Amusements is currently in negotiations with its bank to restructure its debt load after breaching its loan covenants. Half of the debt -- $800 million -- is due Dec. 19, though that deadline is expected to be pushed back to next year, according to people familiar with the situation.
Although the sale was not directly connected to National’s restructuring efforts with its banks, one person close to the company said the lenders could look favorably on the action because it would allow National to offset income earned in 2008 in addition to receiving a tax refund on amounts paid in prior years.
National Amusements spokeswoman Brandy Bergman said, “NAI determined that it would be financially beneficial to sell its stake in Midway in 2008" but declined to comment further.
To pare down its debt, National has also been discussing the sale of other assets, specifically part of its movie theater circuit run by Redstone’s daughter, Shari, which is based outside Boston, and its stake in slot machine supplier WMS Industries Inc.
Sumner Redstone controls 80% of National, while his daughter owns 20%.
A restructuring plan submitted to bankers last week included a proposal to sell all of the circuit’s U.S. theaters outside New England as well as its overseas cinemas in Britain and Latin America, people familiar with the plan said. They said the Redstones wanted to retain ownership of their theaters in Massachusetts, Connecticut and Rhode Island, as well as Russia.