Shearman Brokered Questionable Midway Deal

Midway Games filed for bankruptcy last month and was permitted to proceed in Chapter 11 over the objection of its creditors.  The company, which distributes video games such as Mortal Kombat, the Spy Hunter series, and those Cruisin’ games that are ubiquitous at movie theaters, was effectively controlled by Sumner Redstone.  Creditors objected to an apparent sweetheart deal given to Mark Thomas, a previously unknown investor.

Seeking Alpha summarizes the issues pretty well:

Thomas, for the purchase price of $100k, effectively bought 87.2% of the company and set in motion a process that not only bankrupted the company but also gave him a $30m guaranteed lien against the company’s assets including all of its IP (the company reports total assets of $167.5m and total debt of $281m in its Bankruptcy Filing).

If Midway can’t exit bankruptcy able to repay its debts, Thomas could theoretically use his position to push the company private, cram down its other creditors, and begin anew. It’s over this creditors are crying foul.

The Shearman & Sterling connection, and Thomas’s own law background, after the jump.

Considering Thomas stood to make a 30,000% return in less than a year on a $100,000 investment, most skeptics figured he had to have some inside connection to Redstone.  Thomas, Redstone, and Redstone’s daughter Shari all denied any previous relationship.  In fact, the Chicago Tribune is reporting that they were introduced by lawyers at Shearman & Sterling.

Shearman & Sterling represent National Amusements Inc., Redstone’s movie theater company. Peter Lyons, a partner at Shearman & Sterling, said the firm had discussions with National Amusements executives about potential buyers of the Midway stake. Lyons had met Thomas when the Midway investor was working for the law firm’s clients, which included Georgetown Partners LLC, a Maryland-based private-equity firm where Thomas was a managing director and part owner between 1998 and late 2007.

Lyons (Virginia BA ’77, Georgetown JD ’80) is an M&A partner in the firm’s New York office.  Another deal he worked on is getting a little more press this week: he represented Morgan Stanley as financial advisor to Schering-Plough on its $41 billion acquisition by Merck.  A deal for which, by the way, $146 million in fees are at stake.

Creighton Condon (Penn BA ’78, Columbia JD ’82), another Shearman M&A partner, was also involved in the introduction.

Thomas says he knows Lyons and Condon from previous deals on which the firm represented his former employer, PE fund Georgetown Partners.  One such deal was the acquisition of Envirotest by Environmental Systems Products in 1998.  Georgetown was a significant investor in Envirotest.

Thomas has also been a lawyer.  In his affidavit (available here, but painfully difficult to read), Thomas (Alabama BA ’77, Alabama JD ’80) claims he has a net worth in excess of $10 million.  He has been a workout/turnaround specialist at a number of operating companies, including working on the de-conglomeratization (if that’s not a word yet, it should be) of ITT in the late ’80s and early ’90s that resulted in the spinoffs of components of Alcatel, ITT Sheraton (later Starwood Hotels), The Hartford Financial Services Group, Avis, and Worldcom.

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1. Midway Games Sale Leads to More Questions
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3. Counsel Cleaning up on Cosmetics Deal
4. O'Melveny Dropped for Shearman
5. Deal Professor's Year in Review

Tagged as: M&A, midway, shearman & sterling