Magna Mess

- I wanted to backtrack a couple of days to Magna Entertainment's earnings announcement and investors' conference call from Friday, which is chock full of irony and i-told-you-so's in addition to its immediate and potential dire consequences. As you may have read, the company announced an additional $23 million in losses for the second quarter, bringing the total for the last 3+ years to over $300 million. The news was so bad that Frank Stronach, despite being the interim CEO of the company, couldn't even bring himself to host the conference call. Instead, those honors fell to Tom Hodgson, a former CEO of the company who is now serving as an outside consultant.

"I was quite surprised that you're hosting the conference call," BMO Nesbitt Burns Inc. analyst Peter Sklar told Mr. Hodgson. "Quite irregular that a consultant rather than the management host the call."

Mr. Hodgson told another analyst that Mr. Stronach is away.[Toronto Globe and Mail]

The immediate fallout was the announcement that Magna will give up its Michigan license and not proceed with building a new racetrack near Detroit; and that it will sell the land on which it hoped to build one in Dixon, CA (a plan which was rejected by voters earlier in the year). Of course, that's little surprise. Magna is in no better position to be building racetracks at this point than Countrywide Financial is to provide mortgages to subprime borrowers.

Magna lobbied heavily for the Michigan license, promising to build a $100 million racetrack complex. It was awarded the license in May, 2005.



"In this case we can say this is a trifecta....What we have done today will be a great win for the city of Romulus, for Michigan and I think for Magna, of course." So said Stronach at the time. Others were skeptical, especially considering that not only are slots not approved for tracks there, but full-fledged casinos are prevalent throughout the state. The Detroit News reported at the time:

But many racing industry experts say the Romulus racetrack may end up being another case of Stronach's vision failing to match up with reality.

Specifically, they question why a company would invest $100 million in a horse track that cannot offer gamblers lucrative slot machines.
.....
"He has a history of making promises he doesn't keep," said Jacob L. Miklojcik, president of Michigan Consultants in Lansing and a gaming adviser. "I can't see spending $100 million on just horse racing. It doesn't make financial sense."

"They are saying the same things in Detroit that they said three years ago in Maryland," said Alan Foreman, general counsel for the Maryland Thoroughbred Horsemen's Association. "You have a company that has very questionable finances and seems to be in trouble. The cash flow from racing operations doesn't seem to be sufficient to justify the expenditures they've made in these projects." [Detroit News]

Now, while residents in Dixon are more than glad to see Stronach go, horsemen in Michigan, where Magna has already announced the closing of Great Lakes Downs, are faced with the prospect of nowhere to race.

Ironically, Maryland, the state which has become the reluctant poster boy of what happens to racing in a slots-less state surrounded by those more fortunate, is actually faring pretty well (albeit no doubt in part due to cutbacks made over the past year).

"When you look at the results in Maryland," [CFO Blake] Tohana said, "that operation has done quite well. Year after year they've had positive results, and the Preakness this year was great."
.....
Doug Illig, Maryland Jockey Club's chief financial officer, said the MJC's bottom line was a net profit of $4.6 million in the second quarter, up from last year's $4.4 million.

"We've actually been doing pretty well," Illig said. "We're about $1 million ahead of budget this year. And that's really what corporate looks for. They're happy as long as you meet your numbers."

MEC officials also said they believe slots will be coming to Maryland "within a reasonable time frame," and Tohana added: "There's a lot of positive momentum in those jurisdictions [around Laurel Park and Pimlico]. A lot more positive momentum than previously in the state." [Baltimore Sun]

However, Hodgson warned that none of Magna's tracks are immune to review. "There will be no half-measures, and no stone will be left unturned." [Toronto Star] And it's little surprise that Hodgson singled out Gulfstream Park. Some would consider it the ultimate irony if it was Stronach's most notorious lapse in judgment that ultimately brought the company down....while others might call it poetic justice.

What should be a showcase property for Magna Entertainment Corp. is dragging down the company's results and hurting parent [real estate company] MI Developments Inc...

"The cash flows from Gulfstream are currently not sufficient to service principal and interest payments on its loans," said John Simonetti, president of MI, which holds about 60 per cent of MEC.
.......
"MEC has made substantial capital investments in these facilities and has no realistic prospect of generating an acceptable return on investment in the current operating environment," Mr. Hodgson said. [Globe and Mail]

Gulfstream's slots are averaging a pitiful $79 in daily take, and Hodgson indicated that a cut in the share alloted to horsemen is being considered.

Sam Gordon, president of the Florida Horsemen's Benevolent and Protective Association, said Friday that Magna officials had not yet approached the horsemen's group about renegotiating the deal. Asked whether horsemen would be willing to renegotiate, Gordon said, "I doubt it. Even at those numbers it's not our fault they're not making money." [Daily Racing Form]

Hodgson repeated past assertions that the company's ability to continue as an ongoing concern is in doubt. And Simonetti, whose company holds $160 million of Magna Entertainment debt, again made it clear that their commitment is not open-ended.

"We have to seriously decide to what extent, if any, we will assist MEC going forward, both financially and also, in my mind, assisting with the implementation of the plan that MEC ultimately develops at the conclusion of its strategic review." [Globe and Mail]

Should MI pull the plug, forcing Magna to sell off its tracks, there are naturally no guarantees as to who will buy them, and what they will do with the land. And I wouldn't really expect that MI would care much about their ultimate disposition. I'd be especially concerned about Gulfstream, smack in the middle of an area experiencing rapid residential and commercial development. Could be that Frank's Folly could turn out to be Fatal.