08/31/2004 11:00PM

Churchill emerges as $47M purchaser


In a surprising turn of events, Churchill Downs Inc. completed a $47 million deal late Tuesday night with the Fair Grounds Corp. and the Louisiana Horsemen's Benevolent and Protective Association that could give CDI control of the New Orleans track by October.

The deal still must be approved in bankruptcy court but apparently knocks Mike Pegram, a horse owner, out of the running to acquire Fair Grounds. Pegram signed a deal with Fair Grounds on Aug. 16 to form a company that would have controlled 86 percent of Fair Grounds, with the remaining interest distributed among existing shareholders.

Churchill, which had dropped out of negotiations to buy the track on Aug. 14, renewed its bid last Thursday and finally reached an agreement with Fair Grounds and its president, Bryan Krantz, over the weekend. The CDI bid is a cash deal to buy out all of Fair Grounds' shareholders. CDI's offer was $2 million more than its previous bid under a bankruptcy court auction that originally had been scheduled for Aug. 16 but was postponed.

Fair Grounds Corp. filed for Chapter 11 bankruptcy protection in August 2003, and the CDI purchase must wind its way through bankruptcy court proceedings. Bankruptcy attorneys will file an amended Chapter 11 reorganization plan Sept. 8, and the court could confirm the plan on Sept. 21. Churchill's purchase of the track is scheduled to close on or before Oct. 15.

"Until we get out of bankruptcy, you never know which way it'll turn," Krantz said Wednesday.

Douglas Draper, a Fair Grounds bankruptcy attorney, echoed Krantz's cautionary tone. "A deal isn't ever completely done until it closes," he said.

Churchill fought long and hard to acquire Fair Grounds, which races from late November to late March. The CDI network of racetracks lacks a major winter venue, and the company's bottom line has been hurt by its performance in the first quarter of each year.

"It's obviously very important for our first quarter," said Mike Miller, CDI's chief financial officer. "It's a good fit for our horsemen after the fall meet at Churchill."

Miller said finances to close the deal would come from established lines of credit. CDI shareholders have pre-approved the deal.

Pegram, reached at his home in Arizona, put a positive spin on the deal, but was stung by the sudden twist.

"I'm just sitting on the sidelines watching this thing play out," Pegram said. "I wish Churchill well, and I wish the horsemen well. If Churchill doesn't close on this thing, I'm sitting in the bullpen, waiting to close. I spent 10 months negotiating this thing, and I thought I gave Bryan what he wanted. I know in my heart what they did wasn't right."

Pegram said it was up to his attorneys to decide whether to file suit against the CDI deal. But the partnership agreement signed by Fair Grounds and Pegram appeared to allow for third-party negotiations, and Draper said Churchill had submitted an unsolicited offer last week.

Churchill re-entered the picture by making an informal proposition last Thursday, a day before a bankruptcy court judge agreed to a $25 million settlement negotiated between Fair Grounds and the Louisiana horsemen's group. The court, however, did not approve the Pegram partnership, and did not dismiss the Chapter 11 case, as Fair Grounds and Pegram had asked. On Saturday, Churchill came back with a formal offer, and on Sunday, the Fair Grounds board approved the CDI bid. Pegram was notified of the proposed deal but declined to make a counteroffer.

The financial problems for Fair Grounds stem from a lawsuit by the Louisiana horsemen, claiming the track took improper deductions from video poker machines that should have gone to purses. This past spring, a district court awarded the horseman an $89.9 million judgment.

When Fair Grounds and the horsemen finally settled, it changed the dynamic of the track's plight. Fair Grounds was to have been auctioned off in court, but the auction was postponed. Fair Grounds was given a week to find a financial source to pay the horsemen and its other creditors.

Pegram and Churchill were the main players, and negotiations became intense, with Pegram wresting control in mid-August.

Draper said Fair Grounds was "exercising its fiduciary duty" in choosing CDI over Pegram. Both deals pledged to pay off in full all Fair Grounds creditors with undisputed claims against the track, but under the CDI deal, the horsemen will receive the entire $25 million settlement upon closing, according to Jim Gelpi, lead counsel for the group. The Pegram agreement would have paid $23 million of the settlement up front, with the remainder paid out over time.

The CDI deal also avoids another snag the Pegram partnership faced. The Pegram deal was contingent upon reaching an agreement with Video Services Inc., the company that was contracted to lease and run Fair Grounds' video poker machines. There is a dispute over whether VSI has been contracted through 2005 or 2008, but the sale to Churchill is not contingent upon CDI coming to terms with VSI.

"At this point, we feel like we'll be able to consummate a deal with [VSI]," said Miller, the CFO of CDI.

Churchill has pledged to put $4 million into Fair Grounds improvements over the next two years, while the Pegram agreement earmarked $750,000 for improvements.

Krantz will remain at Fair Grounds as chairman for three years, though he said he hoped to extend his term "if the relationship evolves in a positive way."

CDI surely will attempt to expedite the creation of a slot-machine parlor at Fair Grounds, which has been approved for slots by the state legislature and in a local referendum. Fair Grounds still must undergo a licensing suitability investigation from the Louisiana State Police, but could have slots sometime in 2005.