Redstone Gains From Midway Stake

When it comes to his stake in Midway Games (MWY), Sumner Redstone appears to have made out like a bandit.

Though not many people can trade $245 million worth of stock for $425 million in cash while still essentially maintaining ownership of the stock, that's what Redstone seems to have done.

Better yet for Redstone, the Viacom(VIA) chairman, the way he structured the deal likely minimized the amount of tax he'll pay on his $180 million windfall.

How'd he swing such a deal? By getting National Amusements, the movie theater operator he controls, to pay off a debt in exchange for arguably inflated shares of Midway.

In December, Redstone handed over 32.9 million Midway shares to National Amusements. In exchange, National Amusements assumed responsibility for a $425 million personal debt Redstone had with Citigroup(C).

At the time, the deal didn't look particularly good for Redstone, because Midway's stock was at more than $20 a share -- meaning the stake he transacted was worth a nominal $670 million.

But there's some reason to question how much Redstone's stake was really worth. Midway's stock price had risen more than 500% over the previous three years.

The rising share price, however, didn't reflect improving results: Midway has seen sinking sales of late and hasn't posted a full-year profit in five years.

Instead, the gain was largely the result of Redstone's repeated and massive market purchases of the company's stock.

From September 2003 to December 2005, Redstone's stake -- direct and indirect -- jumped from 13.7 million shares, or 29% of the outstanding stock, to 80 million shares, or 89% of the outstanding stock.

Unloading any significant portion of his stake in Midway on the open market, to pay off his debt for example, likely would have submarined the stock. In fact, even though Redstone's nominal stake in Midway hasn't changed since December, and the company's performance hasn't been much worse, the stock has fallen more than 60%.