09/15/2009 11:00PM

Harrah's buys Thistledown; Lone Star gets bid

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Harrah's Entertainment has won an auction to purchase Thistledown racetrack outside of Cleveland in a deal that could be worth as much as $89.5 million to the track's former owner, the bankrupt racetrack operator Magna Entertainment Corp., according to court documents.

A bankruptcy judge approved the auction Tuesday, one day after it was held in New York. According to Harrah's, the deal is for $42 million in cash at closing, but the agreement also includes additional payments of $47.5 million if a plan to operate slot machines at Thistledown is not torpedoed by court challenges.

Following a deal struck last month to sell Remington Park in Oklahoma City for $80 million to the Chickasaw Indian Nation, Thistledown is the second racetrack that Magna has agreed to sell as part of its bankruptcy reorganization. Magna owes its parent company and largest creditor, MI Developments, $371 million, and proceeds from its auction sales are expected to go toward paying down that debt. The company also owes hundreds of millions of dollars to a variety of other creditors.

Thistledown, a struggling racetrack that has for years been on the brink of closing, was converted into a potential cash cow when the state legislature approved a budget this summer authorizing 2,500 slot machines at the racetrack.

The authorization could not have come at a more fortuitous time for Magna, which filed for bankruptcy in March. Without slot machines or the premium that a buyer attaches to the track to account for their potential legalization, Thistledown was worth little.

Under the current authorization, revenues from the slot machines are split 50-50 between the state and the racetrack. The budget did not include any requirement that purses receive any subsidies from slot-machine revenues.

The proposal authorizing slots machines has been challenged by two separate groups in court. The groups have argued that the legislature cannot authorize slot-machine gambling without a state referendum, and one group also contends that revenues from slot machines can go only toward educational programs and not to private casino operators. A court is expected to rule on the challenges within the next two months.

Also on Tuesday, Magna accepted a stalking-horse bid of $27 million from a company owned by the Chickasaw Indian Nation for the operating assets of Lone Star Park, a racetrack in Grand Prairie, Texas, midway between Dallas and Fort Worth, according to the companies.

An auction has been scheduled for Oct. 7 in New York to entertain any other bids for Lone Star that would be in excess of the amount offered by the Chickasaws, according to court documents. Magna has also asked the court to schedule a hearing for Oct. 14 to approve the winning deal for the track.

The Chickasaw stalking-horse bid is a nearly 75 percent discount on the $99 million deal that Magna reached in 2002 to buy Lone Star's operating assets, an agreement that, essentially, gave Magna access to the revenue streams generated by the racing operation. That deal did not include the track's land or its facilities, which are still owned by the city where Lone Star is located, Grand Prairie.

John Elliott, chief executive of Global Gaming, said that the offer made by Global Gaming was substantially identical to the deal that Magna had made in 2002 to purchase the operating assets for $99 million. He said that the track was not currently profitable, which factored into the price that the company offered. But he also said he was hopeful that the Texas legislature might legalize slot-machine gambling at racetracks in the next several years.

"Over the next few years, I don't think it will generate a lot of cash flow," Elliott said. "Right now, it's probably a break-even proposition. It's a very practical asset to us, because obviously there's some synergy between it and Remington, and hopefully there's some [slot-machine or casino gambling] down the road."

The Chickasaws already operate 17 gambling facilities in Oklahoma.

Michael Wildish, an official with Miller Buckfire, the consulting firm that is marketing Magna's properties in the bankruptcy process, said he expects other companies to at least express an interest in Lone Star now that Magna has accepted a stalking-horse bid.

"The key is to get a stalking-horse agreement in place," Wildish said.