Media mogul Sumner Redstone reached an agreement Friday with bankers to restructure the huge debt of his family company, easing the immediate threat that it would be broken apart.
But the proposed deal requires that Redstone's National Amusements Inc. repay all that it owes -- $1.46 billion -- by Dec. 31, 2010. That means Redstone must sell more assets, including much of his family's theater circuit, to make payments on the loans.
National Amusements said the new arrangement, unlike its previous commitments to lenders, requires that the debt be secured by "substantially all" of its assets, which includes Redstone's controlling stakes in Viacom Inc. and CBS Corp.
If Redstone is unable to meet his debt obligations and again defaults, the banks could demand that the stock of the two media companies be sold -- something that Redstone has pledged not to do. Such an act would unravel the media empire Redstone has stitched together through acquisition over the last three decades.
"This relieves immediate pressure, but his position is still vulnerable," media analyst Harold Vogel said.
The troubled economy, the depressed value of his media properties and formidable debt payments could make it difficult for Redstone, 85, to keep his dynasty. Selling the bulk of the theater chain would not cover the company's debt, according to most estimates.
"He did a remarkable job of collecting these assets and controlling them, but we didn't know how leveraged up he was," Vogel said. "Ultimately, the bank is doing the controlling."
In October, Redstone got caught in the stock market downturn when shares of Viacom, owner of MTV, Nickelodeon and Paramount Pictures, and broadcasting giant CBS plunged in value. The lower prices triggered a violation of debt covenants, accelerating repayment of National Amusements' $1.6 billion in debt.
The company sold nonvoting shares in Viacom and CBS at then-record-low prices to raise money. But the sell-off caused the stock to drop further. Recognizing Redstone's vulnerable position, the banks agreed to renegotiate the loan terms to protect the value of his media holdings.
National Amusements has another large payment due later this year. The deal to restructure National's debt is expected to close in late March.
Media analyst Laura Martin of Soleil Securities said the debt restructuring "grants Viacom and CBS shareholders a reprieve of any imminent potential sale of those shares."
Redstone's company hopes that cash flow from its operations, sale of assets and tax refunds will be enough to cover the payments. It expects a hefty tax refund because it took an enormous loss on the December sale of its struggling video game company, Midway Games Inc.
Those measures might not be enough to satisfy lenders.
CBS said this week that National Amusements might have to sell more shares, "which could adversely affect the company's share price," according to the broadcaster's regulatory filings.
Redstone had already agreed to shed some of National Amusements' 118 movie theaters, many of which sit on valuable real estate. Analysts believe that it will keep its theaters in New England but sell its other U.S. sites. The company, based in Dedham, Mass., near Boston, also has screens in Britain, Russia and Latin America.
A prospectus for the 1,500-screen chain is expected to be sent to potential buyers shortly. But finding buyers who can pay a premium for the theaters could be tough because of the depressed real estate market and tightened credit.
The question is whether the sale of the theaters will generate enough cash to retire a big chunk of the debt. Analysts estimate the chain's value at $500 million to $700 million.
It's unclear what role Redstone's daughter, Shari, will have once the company sells its theaters. She has been running the circuit for more than a decade and holds 20% of National Amusements' stock. But she has feuded with her father over the future of the theater business and issues of succession. They have discussed severing their business ties, but those talks have been put on hold.
Shari Redstone has been leading the company's negotiations with the banks. When the debt agreement is finalized next month, the Redstones probably will try to resolve their business relationship. Shari could split with her father and come away with a group of the theaters.
As for the elder Redstone, his legacy could be diminished.
"His media empire is a shadow of what it used to be," said Vogel, noting that the value of CBS and Viacom shares, like those of many other media companies, are a fraction of what they once were.
"This is what's putting pressure on him," Vogel said. "It's a nightmare at his stage in life that the values of his companies have evaporated."