Lights flicker on Redstone’s empire

Sumner Redstone could soon learn whether the fire sale of much of his family’s movie theater chain will raise enough cash to make a looming debt payment -- or force him to resort to a Plan B to salvage his shrinking media empire.

Bids for the U.S. theaters owned by Redstone’s family firm, National Amusements Inc., are due Tuesday and offers for its British cinemas are expected next week, according to people familiar with the auction who asked not to be identified because the sales process is supposed to be confidential.

The 86-year-old media mogul must come up with $500 million by October to help pay down his firm’s $1.46-billion debt or find himself in default and at the mercy of his lenders. If he doesn’t raise enough money from the auction, he could be forced to unload more stock in the media companies that he controls through National, Viacom Inc., which owns Paramount Pictures, MTV and Nickelodeon, and broadcast giant CBS Corp.

Wall Street will be looking to an update on the auction when Viacom announces its earnings Tuesday. CBS releases its results next week.

“For the stability of the empire that Sumner Redstone has spent his life building, he must successfully deal with National Amusements’ near-term debt maturity,” said media analyst Laura Martin of Soleil Securities.

Redstone has been struggling to pare National Amusements’ huge debt since last fall, when shares of Viacom and CBS fell as the stock market plummeted, causing National to violate debt covenants and forcing Redstone to sell shares in the two media companies. The sale further drove down the value of Viacom and CBS. In November, he dumped his stake in video game maker Midway Games for a mere $100,000 -- taking a tax write-off of nearly $800 million.

National received a reprieve earlier this year from its lenders. The banks restructured Redstone’s debt, spreading the payments over two years to give Redstone time for an orderly sell-off of assets. Since then, Redstone’s position has improved slightly as both Viacom and CBS have gained value in the rising stock market.

Redstone’s plan is to bring National’s debt load to less than $1 billion, then refinance the remaining portion, according to people close to him. That would ease the pressure to shed more assets -- which he is loath to do, particularly his prized Viacom.

The media mogul has been banking on a sale of the theaters to cover the October payment. National operates 118 theaters with 1,500 screens in the United States, Britain, Russia and Latin America. People close to the theater auction, however, say it has not gone smoothly. They describe it as being slow and confusing, with National revising the list of theaters included in the sale.

At first, 54 theaters in the U.S. were offered. The plan was for National to hold on to as many theaters as possible, including those concentrated in New England. Redstone’s daughter, Shari Redstone, has managed the circuit, headquartered outside Boston, for more than a decade, and she wanted to preserve the legacy that dates from the 1930s, when her grandfather, Sumner Redstone’s father, founded the theater company.

But as the auction unfolded, National added at least a dozen more theaters to entice buyers. It is still unclear how many theaters National will end up selling, but about 90 are now on the block, including the Bridge in Los Angeles and 22 theaters in Britain, according to people familiar with the situation. Excluded from the sale are National’s theaters in and around Boston, several in New York City and one in New Jersey.

Still, on Friday, a person familiar with the sale said that there was considerable interest in the theaters as well as the underlying real estate, and that National might not need to sell as many theaters as some had thought. However, because of the recession and tight credit markets, not everyone is convinced that Redstone will get top dollar for his theaters.

Lisbeth Barron, an investment banker at Centerview Partners in New York, said valuations of theater circuits had fallen in recent years.

“A decade ago, theater assets were selling for 8 times to 10.5 times cash flow,” said Barron, who is working with a potential buyer in the National auction that she declined to identify. “Assets currently for sale are likely to be valued at 5.5 times to 6 times cash flow even though the biggest public chains are trading somewhat higher.”

National is not public, so its cash flow is not known. “We estimate the entire chain at $500 million, the size of the debt payment, but he’s not selling it all, so that raises the question of how he intends to cover the gap,” Martin said.

Investors are watching to see whether Redstone’s debt woes trigger the unwinding of his holdings. They note that even if Redstone were to sell off all of his non-voting shares in both CBS and Viacom, that would generate about $750 million before taxes, not even close to paying off National’s debt.

Redstone could also sell some voting shares without giving up his majority stake. Recently, Viacom voting shares have surged in value, signaling that investors believe the stock will become more valuable or that there might be a change in control.

Some have speculated that Redstone might put CBS in play, but it is not an ideal time to sell a media company. CBS, which derives about two-thirds of its revenues from TV and radio station advertising, has been particularly hard hit and its stock has been battered.

The prices fetched by the theaters will determine Redstone’s next move.

A conclusion of the auction could spell the end of Redstone’s contentious business relationship with his daughter. For the last two years, the two have feuded over issues of succession at their family empire and they have long disagreed about the viability of the theater business.

Many believe that Shari Redstone will trade her 20% stake in National for the theaters that were spared from the auction. That includes National’s circuit in Russia, where she spearheaded the building of the largest modern multiplex in Moscow, making National the first major American circuit to venture into that fast-growing market.

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