MAGNA CUM PERIL

In the final week of December, 2008, a newspaper headline was ominous:  Retail experts predict more store closings, bankruptcies, layoffs in 2009.”

 

Will pari-mutuel retailer Magna Entertainment Corporation (MEC) be among the casualties?

 

The Toronto-based Magna Entertainment was launched in 1999 and its stock is traded on the Toronto Stock Exchange and on Nasdaq.   MEC states in its U. S. Securities and Exchange Commission  (SEC)  filings:  “Based on revenues, MEC is North America’s number one owner and operator of horse racetracks, and is a leading supplier, via simulcasting, of live racing content to the growing inter-track, off-track, and account wagering markets.”  

 

While this statement is factually true, Magna Entertainment is certainly not a leader when it comes to profitability.  The company has a consistent record of losses and the red ink is burgeoning, so much so that the “Going Concern” section in  its SEC filings is unequivocal: “…the Company’s ability to continue…  is in substantial doubt and is dependent on the Company generating cash flows that are adequate to sustain the operations of the business, renewing or extending current financing arrangements, and meeting its obligations with respect to secured and unsecured creditors, none of which is assured.”

 

Unfortunately, Magna Entertainment cannot survive on its present course.  Its current ratio, which measures the company’s capacity to meet its maturing obligations, is dangerously below 1, the bottom-line losses are mounting, the company has a negative cash flow, the debt load is growing, MEC is unprofitable on an EBIDTA (earnings before interest, depreciation, taxes, and amortization) basis, and the faltering economy is not conducive to MEC boosting racetrack handle and selling off properties to reduce the debt burden.  In short, the reality is grim and deteriorating rapidly.  Compounding the difficulties, the company has repeatedly had destructive turnover in its top management ranks.  To be sure, a bright spot for MEC is the likely prospect of getting slot machines for the company’s Laurel Park racetrack in Maryland, but that would not be nearly enough or soon enough to rectify the situation.

 

Moreover, although MEC did a 1:20 reverse stock split, effective July 22, 2008, in order to get its stock price over $1 per share and comply with Nasdaq requirements, the share price has again fallen below $1.  Consequently, MEC is in danger of being delisted by Nasdaq, in which case the stock would trade on the Over the Counter Bulletin Board or on the Pink Sheets.

 

Magna Entertainment has closed down some facilities and has a number of its smaller racetracks up for sale.  If  MEC could sell one or more of these, it would provide cash to at least mitigate the debt load, but this is a big if in the current economic downturn.  Even were MEC to sell all of the properties it has for sale, in the near future, it still might not be viable because it has a negative EBITDA in all of its geographic operations, including California and Florida where its two best-known racetracks are located.   

 

MEC’s dilemma is the result of too fast of growth fueled by too much debt to digest and perhaps of overpaying for acquisitions.  The company is de facto bankrupt with no good options left and has destroyed a lot of shareholder wealth.

 

The judgment here is that most of the MEC racetracks would have a better chance at profitability if they were sold off piecemeal, provided that the new owners bought at a reasonable price (i.e., a price justified by the cash-flow potential) and substituted an equity infusion for debt.  Recapitalization would free management of the onerous task of meeting the interest payments on the debt and thereby allow them to make capital improvements, enhance customer service, and devote more resources to sales and marketing.  

 

On their own, the racetracks would also be free of the corporate overhead now allocated to them by MEC.  Finally, privately-owned racetracks would not incur the significant costs that come with being a publicly-traded company and all of the associated government-mandated reporting.  And owners would not be as vulnerable to shareholder litigation. 

 

Magna Entertainment’s founder, Frank Stronach, has a personal story that is both remarkable and inspirational.  It is the journey of a young Austrian immigrant to Canada, who rose from being dirt poor to become one of his adopted country’s wealthiest and most prominent citizens.  Magna International, the auto parts company he started, was the centerpiece of Stronach’s rags to riches saga.  

 

Stronach also became one of the luminaries of Thoroughbred horse racing.   His farms have bred the winners of most of the sport’s premier events, including Breeders’ Cup races and the Preakness and the Belmont.  What he has tried to do for racing with Magna Entertainment is commendable and entailed a risk that he did not need to take on.  But it has not worked as planned.

 

Like Stronach and all serial entrepreneurs, they inevitably experience their share of failures.  For Stronach, the Achilles’ heel has been Magna Entertainment, which is not surprising:  an entrepreneur’s sparkling success in one industry does not mean that the person has gained the acumen to be successful in another industry with vastly different characteristics.  The skills and knowledge needed to start, build, and operate an auto-parts industrial company are not the same kinds of competencies required in a retail horse-racing franchise.

 

The racing industry and its many constituencies have an enormous stake in Magna Entertainment’s outcome.  The shock waves of an outright MEC failure would reverberate throughout the racing world, particularly if the company’s Santa Anita and Gulfstream Park properties were to go the way of commercial and/or residential development in a bankruptcy.  A bloodstock business with a shrinking base of racetracks from which to retail and showcase the product is on a precarious trajectory.   

 

Major stakeholders in the horse racing industry need to consider purchasing individual MEC racetracks and retaining the best sports/retail executives they can find to operate them, probably via equity-sharing incentive compensation.  Attempts have already been made to buy some of the MEC racetracks, but now that the company’s situation is so desperate, negotiations could be more productive.     

 

(Full Disclosure:  Bill Shanklin is not a shareholder in Magna Entertainment Corporation and does not have the company’s stock shorted.)

 

Copyright © 2009, Horse Racing Business

 

Coming Attractions:

 

January 17, 2009:  While Kentucky Slept

 

January 31, 2009:  When Kentucky Awoke

 

Racetrack companies whose stocks are publicly traded will be assessed in the coming months.    

 

 

 

 

 

Comments

  1. D. Masters says:

    MEC (and you really didn’t mention MDI or is that MID) is dead. But I bet you old Frankie comes out smellin’ like a rose with assets he’s siphoned and proted from the afore mentioned corporations.

    We shall see.

  2. I’ve commented on Magna’s approaching demise for some months in my blog. Frank Stronach is simply incompetent as a manger in this industry, despite his other successes. The sooner he sells off Gulfstream, Santa Anita and the Maryland tracks, the better.

  3. “Even were MEC to sell all of the properties it has for sale, in the near future, it still might not be viable because it has a negative EBITDA in all of its geographic operations, including California and Florida where its two best-known racetracks are located.”

  4. In my opinion, Frank will somehow hire someone that understands business and the horse racing business. Ron Charles is the only person involved in MEC that has any of these two attributes. Frank’s management policy has been like the four horsemen of the apocalypes. MEC needs to fire sale Remington, Thistledowns, Portland, Laurel,Pimlico, and most important, Gulfstream. The money they get from these sales would make a dent in the debt service but would not get them to profitablility. They need to bank on Lone Star and the pending expanding gaming legislation that is going to fire up this spring. Santa Anita, Golden Gate and Lone Star would be an asset base that could be managed financially. Frank then needs to tender for the outstanding MEC shares and take this thing private. His personal balance sheet would suffice for the remaining debt and the whole industry would applaud.

  5. D. Masters says:

    On the surface Mr. Stronach may appear incompetent assuming that he wants these assets to succeed. I don’t believe he is incompetent in the least and is crazy like a fox. He knows exactly what he’s doing. Like I said, let’s see what the bankruptcy forms look like;although I highly doubt that what he truly owns or controls thru proxy will ever be made public. I have NO doubt that he has found ways to hide assets to ensure a comfy life in his waning days. And his stockholders, the Feds and racing have let him do this. Somebody sieze his passport; will ya’? Canada…you listening? Not likely.

  6. Halsey Minor says:

    Don’t get me wrong, Frank loves the sport, but Frank loves the tracks purely for ego. Santa Anita and Frank’s Energy Drink are the same, things he can tell cute girls he owns.

    He has never had a concern for the performance of the track operations and his record shows it. Magna is bankrupt and MID is about to erupt into a mass of acrimonious litigation becuase Frank keeps siphoning money off for himself first, and to keep his ego driven hobby alive second.

    I have studied this intertwined mass of super voting stock and cross collateralized debt presided over by a never ending ferris wheel of managers.

    I will promise you this, when this thing goes, it is going to go down far, far harder than anyone can imagine today — especially Frank.

  7. D. Masters says:

    Sorry, Mr. Minor…Mr. Stronach has insulated himself for the inevitable. Fans and racing purists will be left holding the final bag(with the states)..and of course the horses that may have a death trip to slaughter (closures, lack of race venue and liquidation). Horses primary, but secondary of course in the “big scheme” of biz…Adena selling cheap soon. Get your cash ready…get tracks, horses and farms at big discount; especially if you have cash. Geeze Loueeze!

  8. Halsey,

    I couldn’t agree with your statement more. My point exactly. Frank needs to get what he can and get out of the public entity. Things could get ugly. The feds are embarrassed over the Maddoff fiasco and even though the two pale in comparison, a big name is still a big name.

  9. D. Masters says:

    Mr. Minor:

    Mr.Stronach will not suffer. His corporations will. He has found a way to defer and spread the loss at very little expense to his personal self.

  10. Halsey, You’ve got a lot of nerve! What’s it like when you run into Frank in the Paddock for the Florida Derby! More importantly my dear, I’m waiting to see your next chess move with Brunetti. Maybe it’s just an impossibility. As for Gulfstream, what a mess. My mom drove me by on our way to Loehmann’s over Christmas Holidays. It(Gulfstream) looked like Coney Island. Thanks Frank, for the memories. Listen you old Virginia Blue-blooder, bring the old charm back, but maybe that proverbial Horse has left Barn. I believe in you Halsey! Keep going!

  11. Racing insider says:

    Halsey Minor still seems to be doing a whole lot of talking while accomplishing exactly nothing related to that race track talk.

    While nobody should defend Stronach’s idiotic moves and play-without-a-plan mentality, if Halsey Minor really had any hope of becoming a central cog in a thriving racing industry, he wouldn’t be crying sour grapes in every 5th-rate media outlet.

    Additionally, if Magna Entertainment and each of its sister companies went completely bankrupt tomorrow, it would barely cause a ripple in U.S. horse racing.

    If indeed there were a firesale of every Magna track, it would no more than bring about a fair ‘correction’ in the worth of those entities. Something being “worth only what somebody will pay for it” would ring true at such auctions.

    This in much the same way as Canterbury Downs at $55 Million was a fool’s move in an area with people not previously known for heavy gambling. But at $7 or $8 Million Canterbury Downs became a viable investment for somebody else.

    Indeed there are a lot of foolish horsemen with a “herd mentality” who feel they and their futures are tethered to the success or failure of Stronach’s doomed empire, but it simply isn’t true. In many states it has been the horsemen alone who are to blame for having brought themselves into Stronach’s mess. It is they themselves who continue to have the power to extracate their individual corners of the vast racing industry from his grip. They can only do so when united. And when was the last time horsemen at any venue were truly united in concept?

    Racing is what it is… the clueless leading the disenfranchised. On one side of that coin reside Stronach, NTRA and Halsey Minor while on the other side exists fractured groups of uninformed and disunited horsemen along with fans not afforded much of a say in it all.

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