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What Chapter 11 means for Midway Games

February 12, 2009 |  3:30 pm
Mortal Kombat vs. DC Universe

Seeking to avoid mortal combat with its creditors, Midway Games filed for Chapter 11 bankruptcy protection today.

This probably isn't game-over for the Chicago game publisher. Midway has been on the brink for years. It would have tipped over had it not been for Sumner Redstone, whose family owns National Amusements, a holding company that has controlling stakes in Viacom and CBS. Redstone, who now has his own financial troubles, pumped hundreds of millions of dollars into Midway before he was forced to sell the company for pennies on the dollar last year to a little-known investor named Mark Thomas.

The sale triggered a provision in Midway's $150-million debt that allowed creditors to call in their loans -- today. Unable to fork over the cash, Midway filed for Chapter 11. The company owes an additional $70 million to Thomas and $20 million to National Amusements, for a total of $240 million in outstanding debt. Thomas, through his attorney, declined to comment for this story.

Its shares sank 9 cents, or 36%, after the bankruptcy announcement to close at 16 cents, giving Midway a market valuation of only $14.8 million.

"The credit markets have dried up so rapidly, we weren’t able to put together financing fast enough to alleviate the financial situation," said Geoff Mogilner, Midway's head of investor relations.

Ironically, the bankruptcy comes on the heels of the November release of its Mortal Kombat vs. DC Universe. It sold about 2 million copies, ranking ...

... among the best-selling games in that series.

So what now? It's unlikely that the 51-year-old company best known for Mortal Kombat will disappear, analysts said. Instead, the bankruptcy filing gives Midway some breathing room from its creditors, said Michael Pachter, an analyst with Wedbush Morgan Securities.

Midway, which employs 550 people across four development studios in San Diego, Chicago, Seattle and Britain, is worth more if it is allowed to stay in business, Pachter said. "We've learned from past bankruptcies of companies like 3DO and Acclaim that creditors get almost nothing when they liquidate a game company," he said.

"These creditors only get paid if Midway either generates enough profit to allow them to repay its debt or if the creditors convert their debt to stock and they're able to attract a buyer," Pachter said.

Possible buyers include Square Enix, the Japanese game developer of the Final Fantasy game series. Today it offered about $120 million to buy Eidos Interactive, the British owner of the Lara Croft franchise.

Mogilner said the company had no plans for layoffs and was operating normally. Midway is on track to release a driving game called Wheelman, which features Vin Diesel, next month, he said. This is Vegas, a gritty action game, is on target for release toward the end of the year.

That's if Midway's creditors and the Bankruptcy Court judge let it stay in business.

-- Alex Pham

Image credit: Midway Games