Sumner Redstone's Investments Face Mortal Kombat

The Viacom and CBS chairman is bleeding money as his National Amusements theater chain is dragged down by struggling unit Midway Games

It's sure no fun being Sumner Redstone these days. He's just filed for divorce from his wife of five years. The billionaire chairman of both Viacom (VIAB) and CBS (CBS) has been forced to sell $233 million worth of stock in the two media powerhouses to meet the terms of some $1.6 billion in loans and bonds for his privately held National Amusements theater chain. The CBS and Viacom sales are digging a hole in his pocket: He lost $535 million on those alone, based on their stock price decline over the last year.

So, I don't imagine the 85-year-old dealmaker is going to be terribly happy to be reminded of what's likely his worst investment: Tiny Midway Games (MWY), a Chicago video game company known mostly for its Mortal Kombat series. For several years, Redstone, who once said he caught the gaming bug watching his grandson clicking away, envisioned Midway as his play in the entertainment world's next great wave. By late 2005, Redstone and National Amusements together bought up 88% of the company's stock, bidding nearly $24 a share at one point. At its height, Redstone's stake in the gaming entity was worth a cool $1.8 billion.

That was pre-credit crisis and stock market meltdown. Today, Redstone's stake is worth about $62 million. Worse, to keep Midway in business, his National Amusements has been forced to lend it a total of $130 million, in various lines of credit and other agreements. Over the last five years, Midway has lost $493.7 million, including $68.8 million so far this year. And the current quarter is going to be pretty dismal: Since August, the company has twice increased its projected third-quarter loss. A Midway spokesman refused comment, citing a quiet period before the company announces its earnings.

Redstone's Gaming Problem

Redstone, too, isn't talking. But those who know the billionaire investor say he was impressed with the quality of Midway games back then. At one point Redstone wanted to merge the game maker into Viacom, which like Midway caters to younger adults with cable channels like MTV and Comedy Central. The Viacom board studied a merger possibility in 2005, Midway confirmed in one of its Securities & Exchange Commission filings, but that notion fell by the wayside when Redstone decided instead to split Viacom into two pieces, CBS and the Viacom remnants.

The fact is that Redstone simply picked a troubled company and got burned. Michael Pachter, managing director of Wedbush Morgan Securities, follows Midway and figures that Redstone, who accumulated Midway stock for more than two years, paid an average of between $6 and $8 a share for the stock, meaning he spent upwards of $480 million for stock now worth about $62 million. Indeed, Pachter says it was Redstone's relentless purchases—rather than the company's track record of hits—that kept the stock levitating for months. "The story really hasn't changed much since 2003," he says. "This is a company that has never put it all together."

Whatever the reasons for Midway's stunted growth—and the company has had its share of management shuffles, games that have had delivery delays, and the like—Redstone was clearly in over his head. By late 2005, with the stock hovering in the 20s, the billionaire was eager to get out of a $425 million loan to Citicorp (C) he had taken to buy the Midway stock. To "engage in tax and estate planning" and reduce "personal indebtness," SEC documents show, Redstone struck an unusual agreement to have his privately owned National Amusements chain take the loan off his hands in return for more than half his shares. The kicker: Redstone signed away his shareholder voting power to his 54-year-old daughter, Sheri, who serves as National Amusements' CEO and is currently Midway's chairman.

Midway's Issues Mount

As a result, even though Redstone sits on the National Amusements board that controls the Midway vote, Sheri is running the show. (It's not a small issue considering the two Redstones have been feuding for some time.) Sheri has done her best to keep Midway in business. When another loan from Wells Fargo (WFC) came due earlier this year, National Amusements substituted a $30 million loan that is secured by "substantially all the assets" of the game maker, it says in a SEC filing.

Now National Amusements has Midway on life support. The theater chain also loaned Midway $60 million on top of earlier loans, and in September it agreed to buy up to $40 million in Midway's accounts receivable to ensure the company had enough money to produce its fall lineup, including a new Blitz game and Mortal Kombat vs DC Universe, a game that licenses characters like Superman and Batman from the DC comic book world.

But in the greater world of National Amusements' problems, the issues surrounding Midway Games look like small clouds on a stormy horizon. The theater chain is negotiating with its lenders to restructure $800 million of its $1.6 billion in debts that come due in late December. If Midway succumbs—and with mounting losses, loans coming due, and a stock trading at 76¢ on Oct. 23, analysts suggest that's a real possibility—National Amusements will be the proud owner of a video game company with a sorry past and a cloudy future. You have to believe that's not the game Sumner Redstone thought he was playing.

Grover is Los Angeles bureau chief for BusinessWeek.

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