01/30/2009 12:00AM

Breeders' Cup battles deficit


Breeders' Cup Ltd. expects to sell a portion of its investment portfolio this year in order to plug what is expected to be a $10 million operating deficit in its $50 million budget, officials for the Breeders' Cup said this week.

The sales, which would likely raise $5 million or more in cash, are being combined with dramatic cuts to the Breeders' Cup's marketing budget because of the organization's forecast that nomination revenues this year will shrink by at least 20 percent, or approximately $4 million. Breeders' Cup also expects to be $6 million below budgeted revenues in other areas, including sponsorships and its year-end championship event.

Like almost all businesses, Breeders' Cup is caught in the credit crisis, with breeders no longer able to afford rising prices for bloodstock and breeding services. Approximately 25 percent of the organization's budget is tied to the prices of stallion services, and stud fees are being slashed at nearly every major farm in the country.

And like many businesses, Breeders' Cup overreached during the bubble, committing an additional $11.5 million to purses over the past four years even though nomination revenues rose by only $5 million. According to the organization's forecasts, breeders will likely pay about $16 million to the Breeders' Cup in stallion and foal nominations this year, down from $20 million in 2008. But Breeders' Cup still expects to pay out the same amount of purses and breeder awards, approximately $32omillion, officials said.

"If you know what the capital markets are going to do perfectly, if we knew everything that was going to happen, we would not have authorized a purse structure so significantly higher than before," said Greg Avioli, chief executive of the Breeders' Cup. "But no one saw what was going to happen. And the question is not what we did then, it's what we do about it now."

In 2006, Breeders' Cup added $6 million in purses to its eight-race schedule, raising total purse distribution for the championship event to $20 million. The next year, Breeders' Cup added three new races and expanded to two days, with each of the new races offering a $1 million purse. In 2008, it added another three races with total purses of $2.5 million, bringing total purses for the two-day event to $25.5 million, up from $14 million just three years earlier.

The 2009 budget is perhaps the most dire financial problem faced by the Breeders' Cup, which ran its first event in 1984. The organization has enjoyed wide support from breeders, who fund approximately 40 percent of its annual budget, but strains began showing up late last year when the Breeders' Cup board voted to suspend a $5 million program that provided purse supplements to about 100 stakes across the country.

Some breeders criticized the decision, contending that there was no widespread consultation with them and pointing out that they pay $500-per-foal nomination fees to make their foals eligible to earn the supplements during their racing careers. Even after the board reinstated the supplements just one week after the program was suspended, hard feelings remain.

Rob Whiteley, former bloodstock manager for Carl Icahn's Foxfield Farm who now runs Liberation Farm, said he is still deciding whether to nominate foals to the Breeders' Cup this year because of his dissatisfaction over the initial suspension. Whiteley said he has paid $2 million in foal and stallion nominations to the Breeders' Cup while at Foxfield and Liberation.

"I'm waiting to see how the Breeders' Cup addresses its election process and management and decision-making issues," Whiteley said.

In 2008, according to Breeders' Cup officials, foal nominations accounted for $8 million of the organization's $20 million in nomination revenues. The remainder was raised through stallion nominations, which require stud owners to pay the equivalent of one stud fee each year for any stallion who has 50 or fewer live foals. The fee rises to 1.5 times the stud fee for 51 to 100 live foals, and two times the stud fee for more than 100 live foals.

Breeders' Cup expects the nomination revenues to decline in several ways. The most dramatic decline will likely occur in stallion nominations, because breeders are slashing stud fees. In addition, the foal crop is contracting, meaning that there will be fewer stallions producing foal crops in excess of 50 or 100 foals. Also, economic hardships could persuade some breeders to pull back on nominating foals.

Revenues for the Breeders' Cup are drying up in other ways. Already, Bessemer Trust, the private wealth-management company chaired by Breeders' Cup trustee Ogden Mills Phipps, has dropped its sponsorship of two races. Bessemer had sponsored at least one Breeders' Cup race for eight years. Other sponsors, which include Emirates Airlines, Grey Goose, Sentient Flight Group, and TVG, will almost certainly re-evaluate their agreements this year as companies cut marketing budgets during the recession. In 2007, the latest year for which figures are available, total revenues from sponsorships were $6.9 million.

Several Breeders' Cup officials contend that the organization cannot roll back championship purses despite their rapid growth over the past four years, citing the unfavorable reaction of breeders to the suspension of the supplement purse program. As a result, Breeders' Cup is scrounging to find ways to cut costs.

It has frozen salaries and suspended bonuses and incentive payments for senior managers, eliminated several positions, and trimmed $4.5 million from its marketing budget, according to Avioli. The marketing budget includes money for television buys for national racing broadcasts, and a number of stakes races that have been telecast live on ESPN or ABC will not be seen on those networks this year, Avioli said. It is likely, however, that those stakes will still be broadcast on TVG or HRTV, two horse racing networks.

Avioli said that compensation for all personnel has been cut 13 percent because of the measures. According to the Breeders' Cup's tax return for 2006, the most recent that is publicly available, Avioli was paid $517,965 in annual salary and $248,175 for employee benefit plans that year. Avioli declined to comment on his compensation specifically, but said that any measure adopted for senior management would affect his position.

The cost-cutting measures, however, have still left a $5 million gap. The investment portfolio is currently valued at $30 million - following a 25 percent decline last year - and will likely be tapped to cover the gap. According to Breeders' Cup chief financial officer Matthew Lutz, the portfolio is weighted 55 percent to cash and other highly liquid, stable investments such as bonds and Treasury notes. The remainder is in stocks and other equities.

William Farish Jr., chairman of the Breeders' Cup board, said that no one is happy about dipping into the reserve but that they will likely have no other choice. Farish said the Breeders' Cup will examine its options over the next six months, starting with a special meeting of its board on Wednesday.

"For 2009, we will have a two-day Breeders' Cup, and it will be at Santa Anita," Farish said, referring to considerations for the immediate financial problems. "Beyond that, it's hard to say."