Will Midway Vaporize in January? …Pachter Explains

On Monday GamePolitics reported that financially-troubled Midway had been sold to a no-name investor for the shockingly low price of $100,000.

Along with assets like the Mortal Kombat and Blitz: The League game franchises, mystery man Mark Thomas also bought himself $70 million worth of Midway debts.

Late yesterday, Midway filed a document with the Securities and Exchange Commission which outlines what the deal means for the company and its shareholders. Essentially, the change in ownership permits Midway’s creditors to demand payment in 50 days and they are expected to do so (GP: wouldn’t you?).

In the interim, Midway is hoping that investment firm Lazard will help them find a way to avoid being forced into liquidation when the loans are called. So, what does it all mean? Will Midway cease to exist in 50 days? We put those questions to Wedbush-Morgan game industry analyst Michael Pachter:

It means that because of the change of ownership from Redstone to Thomas, some of Midway’s creditors holding $150 million of debt are able to demand repayment in January.  Midway expects this to happen, and hired Lazard to help them figure out how to refinance.

It’s really interesting, because the creditors cannot expect Midway to repay unless the company remains in business.  If the creditors compel bankruptcy liquidation, they’ll get something, but arguably less than the full $150 million.  Midway’s assets are worth something, but in this market, it is hard to figure out how much.  As a comparison, THQ has an enterprise value of only $80 million, so Midway’s assets in liquidation would have to be worth twice as much as THQ’s (as a going concern) for the creditors to be repaid.

My guess is that Midway works out a deal with the creditors and remains in business, but they are going to have to start generating sustainable profits soon, or their creditors will become impatient.

The other real interesting thing is the change of control provision.  While not uncommon, this one makes it clear that the creditors felt comfortable as long as [former owner Sumner] Redstone had skin in the game.

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