Sumner’s unintended consequences


What did Mark Thomas get when he bought Sumner Redstone’s 87% stake in Midway Games without consulting Midway management? Maybe a financial mess. The company says in an SEC filing that the change of control has made $150 million of debt due and payable right now – and Midway has no way to pay it. A special committee of the company’s board of directors has retained Lazard to assist it in evaluating strategic and financial alternatives.

The move by Redstone to sell his entire stake appears to have caught Midway management completely off guard. It’s own SEC filing says its information about the change of control is based entirely on information contained in the SEC filing that Redstone made to report the sale to Thomas. Midway notes that the agreement filed says Thomas’ MT Acquisition Holdings is paying approximately $100,000 for the stock, along with assuming liability for loans made to Midway by National Amusements Inc. (NAI), the entity via which Redstone controls both CBS Corporation and Viacom. “the registrant does not have knowledge as to the Purchaser’s source of these funds,” Midway stated, indicating that Thomas is still pretty much a mystery man to the company.

Two investors quickly moved to notify Midway that the change of control had made their bonds due and payable immediately – and that they wanted their money. That’s quite an acceleration, since the 6% convertible senior notes aren’t supposed to be due until 2025 and the 7.125% convertible senior notes in 2026. If all holders exercise their rights to sell their bonds back to Midway for 100% of face value, the company would have to come up with $150 million in cash. Not surprisingly, Midway doesn’t have that much cash lying around. So, if it fails to meet those obligations, the trustee for the bond holders could declare the notes in default.

In turn, a default on the notes would also make the $90 million in loans from NAI due and payable immediately. Likewise, Midway says it doesn’t have the ability to make that payment either.

Just how Midway might get out of this mess remains to be seen. It’s doubtful that the advisors coming onboard from Lazard have ever seen such a situation, so they and, no doubt, teams of lawyers will be pouring over the terms of the notes and looking for legal precedents to see just what options the company has.

Meanwhile, Robert J. Steele has resigned from the Midway board of directors. He had represented NAI.

RBR/TVBR observation: Was Sumner not thinking straight, or is he just under so much pressure to refinance the debt load at National Amusements Inc. without selling more of his Viacom or CBS Corp. shares that he acted impulsively? It’s pretty clear from the SEC filing that the whole thing caught Midway management by surprise.