What's Redstone's Game At Midway?

Octogenarian Sumner Redstone is into games -- video games, that is -- "the hottest part of the entertainment industry," he told me the other day. That, plus a comeback at producer Midway Games (MWY ), explains why the Viacom (VIA ) CEO this year more than doubled his stake in Midway, to 74%. "Add turnaround to industry growth -- that means 'buy' to me," he said.

To Redstone's fellow investors in Midway, however, his enthusiasm may wind up meaning "sell." Redstone is exploring a buyout of the minority shareholders. He stresses this is just one option. Yet the prospect inevitably raises the question: At what price? Any buyer naturally wants to pay as little as possible. But if you're a seller who is being asked to give up your share of the future, you would want to get the most you can in return. Finding a fair price would probably fall to a special committee of the board. That group, in turn, might rely on Wall Street bankers who, for a fee, would estimate the company's true value. All this is getting dicier as regulators, including the Securities & Exchange Commission, scrutinize how such opinions are solicited and rendered, fearing that conflicts of interest may benefit majority holders over minorities. In this climate, the Midway board may soon have its hands full.

TO SEE WHAT I MEAN, first note that Midway's new strategy -- of focusing on fewer games, but better-quality ones, such as 2004's NBA Ballers -- has it expecting a 60% jump in 2004 revenue (charts). The future promises more gains. With consumers TiVo-ing out TV ads, games may emerge as alternative ad venues. Shari Redstone, Sumner's daughter and Midway's vice-chairman, explains: "Unlike television, you know they're glued to their screen."

Valuing this potential would be up to the Midway board if Redstone makes a bid. The market price for the minority shares is $225 million, but presumably Redstone would have to pay more. Now, examine Midway's board. This spring, as Redstone's stake topped 50%, he got Midway to cut its board from 11 seats to 8, including one for his daughter. Another new director, Kenneth Cron, was CEO of Vivendi Universal Games (V ) until January, when Vivendi installed new management. In April, he became interim CEO of Computer Associates International (CA ). In May, Redstone nominated him to Midway's board, and on June 14, Cron became chairman. A third new director is Joseph Califano Jr., president of the National Center on Addiction & Substance Abuse and a director of Viacom, Redstone's chief holding.

Four Midway board veterans -- Harold Bach Jr., William Bartholomay, Louis Nicastro, and Ira Sheinfeld -- also serve as directors of gambling-machine maker WMS Industries (WMS ), which until 1998 was Midway's parent. Redstone holds nearly 30% of WMS. Also, WMS and Midway are clients of Bartholomay's and Sheinfeld's insurance and law firms, respectively. Shari Redstone declined to discuss how the board might evaluate a bid from her dad; the other six did not respond to my calls.

That left Robert Waxman, a New York accountant, who declined comment. Redstone said: "No stockholder of any company in which I'm involved would be treated worse than me and probably better.... If the person who controls the company wants to protect its stockholders, he can do that." If only minorities could always simply trust the majority.

By Robert Barker

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