Last week, shares of CBS and Viacom got slammed when National Amusements Inc. (the investment vehicle for Chairman Sumner Redstone) announced it was selling off a major chunk in the two companies to comply with debt covenants. By Monday, that sale was complete, but the story doesn’t just end there. Today, NAI is out with a new statement saying it’s in negotiations with its bank group and noteholders regarding a covenant issue. The announcement is pretty light on details.
Pali’s Rich Greenfield believes these negotiations are urgent, and that the crisis could end up forcing Sumner to loosen his grip on the two companies:
We believe NAI’s banks are working feverishly to restructure NAI’s debt load, as we know about half of the gross debt of $1.6 bn comes due in 60 days. If NAI is unable to access the debt markets to refinance its bank debt, NAI would have to sell all of its non-voting shares of Viacom and CBS and even begin to sell some of its voting shares. While NAI’s net debt/assets is approaching 2x again, following a bounce in stock prices and the sale of shares, a significant drop could put Mr. Redstone in a very challenging liquidity situation. Time is clearly of the essence, in terms of a restructuring.
But all this raises a question: Why does NAI, which also owns a chain of movie theatres, have all this debt ($1.6B reportedly) to begin with?
We believe the missing link is likely the divorce settlement between Sumner and Phyllis Redstone, which was finalised in July 2002. Sumner Redstone’s net worth was nearly $7 bn at the time, and we highly doubt that he and his wife of 50+ years had a pre-nuptial agreement. While the drawn out divorce battle terms were never made public, we believe the settlement was somewhere between $1.5-$2.5 bn.
Given that Sumner did not sell any Viacom shares at the time, nor give Phyllis Redstone any ownership of NAI, we presume that he utilized the underlying value of the theatre chain and his Viacom stock to raise debt to fund his divorce settlement. $2 bn would be just about right as the missing link in the maths equation referenced above.
Is it all a tad soap opera-ish? Sure it is! It’s Sumner Redstone! But the ramifications are serious. CBS and Viacom will continue to take a beating if Redstone has to dump more shares onto the market. And when Redstone has to dip into his voting shares, then the future of CBS and Viacom in their current forms becomes an open question.