On Monday GamePolitics reported that financially-troubled Midway had been sold to a no-name investor for the shockingly low price of $100,000.

Along with assets like the Mortal Kombat and Blitz: The League game franchises, mystery man Mark Thomas also bought himself $70 million worth of Midway debts.

Late yesterday, Midway filed a document with the Securities and Exchange Commission which outlines what the deal means for the company and its shareholders. Essentially, the change in ownership permits Midway's creditors to demand payment in 50 days and they are expected to do so (GP: wouldn't you?).

In the interim, Midway is hoping that investment firm Lazard will help them find a way to avoid being forced into liquidation when the loans are called. So, what does it all mean? Will Midway cease to exist in 50 days? We put those questions to Wedbush-Morgan game industry analyst Michael Pachter:

It means that because of the change of ownership from Redstone to Thomas, some of Midway's creditors holding $150 million of debt are able to demand repayment in January.  Midway expects this to happen, and hired Lazard to help them figure out how to refinance.

It's really interesting, because the creditors cannot expect Midway to repay unless the company remains in business.  If the creditors compel bankruptcy liquidation, they'll get something, but arguably less than the full $150 million.  Midway's assets are worth something, but in this market, it is hard to figure out how much.  As a comparison, THQ has an enterprise value of only $80 million, so Midway's assets in liquidation would have to be worth twice as much as THQ's (as a going concern) for the creditors to be repaid.

My guess is that Midway works out a deal with the creditors and remains in business, but they are going to have to start generating sustainable profits soon, or their creditors will become impatient.

The other real interesting thing is the change of control provision.  While not uncommon, this one makes it clear that the creditors felt comfortable as long as [former owner Sumner] Redstone had skin in the game.

Citing losses and difficult economic news, game publishing giant Electronic Arts announced yesterday that it was laying off 6% of its work force.

That's more than 500 employees.

As reported by VentureBeat:

During the quarter, EA relied on the staple of its sports franchise, Madden NFL 09, which sold 4.5 million copies. Spore sold two million units. That’s a respectable amount, and the title is sure to sell steadily into the future to mass market audiences. But it’s not the mega-hit that some had hoped for. Another big title was Warhammer Online... EA sold 1.2 million copies...

[EA CEO John] Riccitiello said in a conference call that the postponement of the Harry Potter movie and its accompanying game was a big reason for the shortfall...

In an investor's note issued moments ago, Wedbush-Morgan analyst Michael Pachter was critical of EA management, while still recommending the publisher's stock as a strong buy:

EA management was somewhat aloof during [yesterday's] earnings call. With the stock hovering near a seven-year low, management continued its recent history of disappointment, and spent an inordinate amount of time sowing seeds of fear about the potential for a tepid holiday sales season. EA’s share price in after hours trading reflects that many investors have abandoned hope...

 

management has demonstrated an uncanny ability to snatch defeat from the jaws of victory in the eyes of investors, and we think that these old habits will take a long time to die...

Seeking Alpha has a transcript of yesterday's conference call.

GP: We'd have to agree with Pachter. While John Riccitiello started strong when he returned to EA last year, in 2008 we've witnessed a series of embarrassments take place on his watch. From the lengthy, abortive attempt to seize Take-Two to the Spore DRM debacle and Ricitiello's subsequent insult to those who protested, it hasn't been pretty.

Regarding Spore, while it has done well at launch (thanks to the hype) the game is simply not going to be a Sims-like cash cow in the long run. It's not as well done as The Sims and lacks the feminine appeal which sustained The Sims over the long haul.

While video games are said to be recession-proof, video game publisher stocks are not immune to Wall Street turbulence, as witnessed by yesterday's market free fall.

As GameSpot reports, virtually all of the major game publishers took a hit in yesterday's sell-off after Congress failed to pass a bailout bill.

Wedbush-Morgan analyst Michael Pachter managed to find some humor in the situation, however, as reported by Cnet:

Wedbush Morgan analyst Michael Pachter, who tracks the video game market, said his industry will suffer like any other, though he did offer a suggestion for how to make lemonade from the financial lemons being lobbed from Washington.

 

"I think we need a game where instead of shooting (Nazis), we shoot Congress," he said. "This is embarrassing."
 

Reaction has been swift to yesterday's report that EA was giving up on its quest to acquire Grand Theft Auto publisher Take-Two Interactive.

As GP predicted yesterday, Reuters is now reporting Take-Two's stock price has plunged. Indeed, from Friday's close just under 22, as I write this the stock [TTWO] has dropped to 16.44. On the other hand, the market as a whole is experiencing a broad sell-off today as shockwaves from the collapse of Lehman Brothers and the purchase of Merrill-Lynch ripple through Wall Street. At the same time, EA [ERTS] stock is also down from Friday's closing price of 44.99.

Reuters quotes UBS analyst Benjamin Schacter on the EA-T2 situation:

While (Electronic Arts) will not reveal details about its exact reasons for walking, the fact that it did not make any offer after further due diligence will certainly raise some eyebrows.

 

In our view, Ubisoft could be a logical buyer, but a deal would not be easy. Traditional media companies as well as Asian video game publishers-operators might also be interested, but we don't believe that these players are likely to even match EA's prior offer given that none would have synergies in the sports genre.

When a publicly traded U.S. company experiences what the Securities and Exchange Commission terms an "unscheduled material event" it is required to file a form 8-K in order to alert stockholders and the market at large.

For example, Electronic Arts filed an 8-K just yesterday to inform the market that Harry Potter and the Half-Blood Prince was slipping into 2009, with a resultant loss of significant expected 2008 income.

So, if the rumor that EA's upcoming Dead Space has been banned in three markets - China, Japan and Germany - is true, might that not trigger an 8-K disclosure as well? None has been forthcoming so far.

For the answer, GamePolitics turned to financial analyst extraordinaire Michale Pachter (left) of Wedbush-Morgan:

GP: If Dead Space was really banned in three major markets (Japan, China, Germany) as the rumor currently goes, wouldn’t that be a material event that EA would need to disclose to the stock market? Also – does EA sell console games in China? I thought no one did because of piracy issues.

PACHTER: Germany will allow the game with modifications.  Japan and China are essentially closed markets.  So really, no big deal. No consoles in China, yet

GP: Can you elaborate on what you mean by "closed market" in terms of Japan?

PACHTER: EA sells very little there, maybe $50 million per year, mostly PC games. I don't think it is that controversial.  [Dead Space] is a horror game, not the same as Manhunt.  The bans are from the usual suspects, not a big deal

GP: Thanks, Mike.

Although Pachter confirms that there are no console sales in China, Dead Space is scheduled to release on PC, so that's the version which EA would want to market in China and Japan. If the ban is real (still a pretty big "if" at this point), it likely involves the PC flavor of Dead Space in those markets.

Clearly, Pachter does not see this as a significant issue for EA, at least in the financial sense. Bans are always troubling, however, so we eagerly await EA's official word on this.

As we mentioned in the previous story, EA released some surprising info today:

• it will not renew its tender offer (expiring at midnight) to buy T2 shares at $25.74
• EA and T2 have been talking, with T2 preparing a secret presentation for EX execs

For expert analysis we turned to Michael Pachter (left) of Wedbush-Morgan who told GP:

It appears that EA is proceeding with a friendly deal.  The two companies exchanged letters over the weekend, with EA saying the offer price would require review (meaning they are inclined to go lower) because the deal cannot be completed before the holidays.  Take-Two's response was an offer of due diligence, including the presentation of non-public information under a non-disclosure agreement, intended to support a higher value.

 

EA accepted the offer of a presentation, and intends to allow its hostile tender offer to expire.  This merely changes the proposal from hostile to friendly, and keeps the pressure on the FTC to rule by Thursday, as previously expected.

 

My guess is that the parties reach an accommodation shortly at a $1 - 2 premium to EA's current $25.74 offer.  We have said this consistently since February 25, and continue to believe a deal gets done this month.  If Take-Two management holds out for a price in the $30s, EA will go hostile again, likely at a price closer to $20.  If Take-Two management negotiates a price below $27.50, I think a deal gets done.

 

The only surprise to me is that EA agreed to go friendly.  I suppose that they figured it was magnanimous to make the attempt, and Take-Two management recognized that this was its last and only opportunity to affect the outcome.  I really expect the parties to reach an agreement close to the $25.74 price (slightly above).

 

I do not expect EA to be impressed with the presentation, which will include a 3-year release schedule and a list of cost control initiatives, but believe that it will allow TTWO management to save face.  EA is unconcerned about cost control, since it will eliminate most operating expense once Take-Two is integrated, and should not be particularly surprised to learn that GTA 5 and BioShock 2 are planned.
 

On Saturday I wrote in my Joystiq column that E3 is dead.

This is my strongly-formed impression based on the sorry state of last week's show at the Los Angeles Convention Center.

Calling the LACC "quiet as a college library during summer," Wedbush-Morgan analyst Michael Pachter raises similar concerns.

Pachter recaps the show in a note issued this morning:

The show was small in scope, and the spectacle of E3 is dead. The Los Angeles Convention Center concourse was as quiet as a college library during summer, with little to attract media attention. The main game display area was similar in size to a school cafeteria (as compared to filling the entire convention center)...

 

E3 is headed for extinction, unless the publishers and console manufacturers wake up to the fact that nobody cares about the show anymore... [the] show is ill-timed, coming after most major holiday announcements are out, and landing during [SEC-mandated] “quiet period” for most of the companies...  The lack of a spectacle will likely keep media away in the future, the lack of surprises will keep retailers away, and the lack of interaction with management will likely keep investors away...

 

We strongly believe that E3 should be held no later than early June (when companies can meet with investors and when some “secrets” have yet to be revealed), and believe that the spectacle should be restored by increasing the size of the show space. 

Pachter goes on to say that game publishers made a mistake by insisting on a smaller show in order to save money:

This is the second year of the new, slimmed-down E3 format demanded by the Entertainment Software
Association’s membership in order to control the significant costs incurred for prior E3 events. We believe that the smaller scale is a mistake, and believe that the media attention attracted by prior shows had far greater value than most of the ESA’s members appreciated.

Did anyone notice that Take-Two (NASDAQ: TTWO) closed today at $25.14, or sixty cents under EA's current (and apparently endlessly renewable) $25.74 tender offer?

By our count it's at least the second time that TTWO has closed below the tender price in the past week, admittedly a rocky one for Wall Street. It seems kind of strange, since EA will buy all the TTWO you care to sell them at 25.74. Why would anyone sell below that price?

For interpretation, GamePolitics turns to Wedbush-Morgan super-analyst Michael Pachter:

GP: Mike, what do you make of TTWO closing well below the EA tender price of 25.74? That would seem to be a natural floor…

Pachter: The daily [share] price is the probability-weighted price of a [T2-EA] deal happening. [The expectation of] no deal is [priced] around $17-20, a deal at $28 has a relatively high probability. Before, the arbs placed a higher chance of a deal, and a higher [share] price.

GP: So are you saying that today's close $.60 under the [EA] tender price reflects a sense that the deal is now less likely?

Pachter: A combination of less likely or a lower expected deal price.  Probably more of the latter, as a tribute to EA's discipline.  Still very likely that a deal happens at $27-28.

In our previous GamePolitics story we described how the Federal Trade Commission went to U.S. District Court in an attempt to force Grand Theft Auto IV publisher Take-Two Interactive to cooperate in an anti-trust investigation related to Electronic Arts' potential takeover of T2.

So, why would Take-Two thumb its nose in the government's face, even to the point of reneging on previously agreed-upon conditions?

We asked financial analyst Michael Pachter (left), who covers the video game sector for Wedbush-Morgan:

I think that the reasons range from A) being incredibly savvy and holding off the FTC as a tactic to slow the process to Z) being incredibly arrogant.

 

It's hard to know where Take-Two fits on the scale from A to Z.  Their general counsel is pretty experienced, and it surprised me that he would allow the company to deal with a subpoena this way.  The FTC's action of seeking a court order is pretty severe, and shows how seriously the FTC takes this slight.

 

I'm not sure what Take-Two hopes to gain from this, other than the obvious delay to the process.  However, the process won't be delayed if Take-Two's failure to comply with the subpoena results in the FTC granting approval without looking at these documents. There is NOT a presumption of anti-competitiveness, and if EA demonstrates that the combination would not be anti-competitive, Take-Two would be better served to provide evidence to the contrary if it wishes to remain independent.

 

It seems to me that they would be best served by cooperating fully with the FTC, and by pointing to records that show how competitive their business is with EA's business.  Apparently, they have reached a different conclusion.

 

 

UPDATE: So, what's to be gained by delaying? We put that question to Pachter as well:

I think it's always in their best interest to buy more time.  Management has an incremental 720,000 shares of restricted stock that vest if the takeover happens after March 31, 2009.  More time buys them a greater ability to prove the impact that they've had on the company, and they appear sincere in their belief that they have turned Take-Two around.  More time allows Activision to close its Vivendi deal and give Take-Two a look.  Ubisoft might be interested...