U.S. recession made official
Sumner Redstone sells stake in Midway GamesThe U.S. recession was made official Monday, but no one had to tell Sumner Redstone.
The National Bureau of Economic Research, the country's business cycle arbiter, surprised investors by declaring that not only has the U.S. economy lapsed into recession but that it began a year ago and the downturn could be the worst since World War II. The Dow took note and slumped 680 points, down almost 8% on the day.
The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early '80s.
Meanwhile, Redstone on Monday fired the opening salvo in his war on debt, selling his stake in video game maker Midway Games for only $100,000 plus the assumption of debt. The move makes for a loss in the investment for Redstone that is estimated in the hundreds of millions of dollars.
With the clock ticking down to a Dec. 19 deadline to repay or restructure a big pile of debt at his holding company National Amusements, the Redstone family's team of advisers is expected to focus next on a partial or complete sale of the movie theater chain of the same name and of a stake in slot machine firm WMS Industries, the former owner of Midway.
The holding firm has $1.6 billion in debt, half of which comes due Dec. 19. One source Monday confirmed a Wall Street Journal report that said the Redstones are looking at restructuring their debt and securing it with some of their remaining assets, which hadn't been the case so far.
Such a deal would seem to have been complicated by a continuing decline in the public market values of key Redstone holdings CBS Corp. and Viacom.
Not that the two Hollywood studios are alone among media conglomerates in the sagging of their shares. Others too have suffered from the current stock market gyrations.
"I think that we've got a ways to go, that this is going to be probably a deep and long recession," Jeffrey Frankel, a Harvard University economist who sits on the NBER's committee, told CNBC. "It could be the worst post-War recession. We don't know yet."
The NBER does not define a recession as two consecutive quarters of decline in real gross domestic product, as is the rule of thumb in many countries. Instead, it looks for a decline in economic activity, spread across the economy and lasting more than a few months.
The current downturn was particularly tricky to define because GDP remained positive in the first half of 2008. The NBER said its committee looked at payrolls, which peaked in December 2007 and declined in every month since then, as well as real GDP and other data to determine when the recession started.
As far as Redstone is concerned, a restructuring of National Amusements' current debt arrangements could give he and his family more time to sell assets without having to divest for fire-sale prices in a down market, as was the case in the sale of Midway.
Analysts have pondered how much a sale of the privately held NA theater chain could yield. Pali Research analyst Richard Greenfield has pegged the exhibition circuit's likely price target at about $500 million, but reports have said Redstone himself sees a chance of fetching as much as $1 billion.
Shares of WMS closed Monday with a market capitalization of $1.1 billion. NA holds a small stake in the company after selling shares this year. Some analysts have estimated the remaining stake could be worth $100 million.
A Redstone spokeswoman Monday had no comment on the status of the debt negotiations or possible further asset sales. Redstone recently was forced to sell $233 million in nonvoting shares of CBS and Viacom to stay in compliance with an NA loan.
Redstone had acquired a controlling stake in Chicago-Midway, best known for its "Mortal Kombat" franchise, a few years ago as media moguls started paying increasing attention to the booming gaming sector. But he and all the industry observers following the move had to learn the hard way that gaming deals don't always necessarily throw off a profit. The firm simply has not overcome a lack of creative successes.
Midway said in a regulatory filing Monday that Redstone, NA and another entity sold all their 80.3 million shares Friday, or a stake of about 87%.
The price of $0.0012, or less than a penny per share, was paid by a vehicle controlled by little-known investor Mark Thomas, according to the SEC filing. Thomas also will take on $70 million in debt on Midway's books.
The Wall Street Journal said the sale will lead to a tax loss of more than $800 million for NA this year, which it can turn into a hefty tax benefit, though.
"Looks like Sumner 'gave' Midway away for a tax loss," Wedbush Morgan Securities analyst Michael Pachter said. He estimates that Redstone may have lost $600 million-$700 million in his Midway adventure.
Shares of Redstone-controlled companies and many other media and entertainment firms fell along with the broader market Monday amid global recession concerns.
The NBER said the U.S. downturn started in December 2007 and marked the end of the latest cycle of economic expansion that began in November 2001 after the previous recession. The growth cycle lasted 73 months, compared with the 1990s growth run that continued for 120 months.
For its part, the White House acknowledged the NBER's official declaration but said that did not change its course on coping with the financial crisis.
"The most important things we can do for the economy right now are to return the financial and credit markets to normal and to continue to make progress in housing, and that's where we'll continue to focus," White House spokesman Tony Fratto said.
George W. Bush is the first president since Richard Nixon to preside over two recessions.
Reuters contributed to this report.