09/01/2011 1:14PM

Keeneland September: The art of the deal rethought

Tom Keyser
Owner Rick Porter said buyers today are less likely to get into bidding wars for stallions. “Unless you have a very sexy stallion with pedigree and a great race record, there aren’t any buyers today.”

As recently as five years ago, the market for stallion prospects was flush, thanks to bidding wars between Sheikh Mohammed al-Maktoum and Coolmore Stud, easy credit for equine investments, and wealthy speculators who were happy to put money in stallion shares.

But since bloodstock prices collapsed along with worldwide economic conditions in 2008, sellers of stallion prospects have faced a much colder financial climate. Credit and speculative shareholders have disappeared, and so have many of the broodmares whose stud fee payments are the basis for stallion economics. The bottom line: Fewer mares means less money for all but the elite stallion prospect − and the definition of “elite” has tightened up considerably.

“The market has changed dramatically,” Rick Porter said.

In 2007, before the market downturn, Porter fulfilled every colt owner’s dream when he sold his Grade 1-winning Danzig colt Hard Spun to Darley Stud. Around the same time, Darley also bought Street Sense and Any Given Saturday, paying about $100 million for the trio of 3-year-old colts. Four years later, with these young sires’ horses coming to the races and sales, Darley is less aggressive in its pursuit of new stallions, and with stallion income dropping, there are fewer buyers at all levels. Porter was able to work multiple bidders against each other several years ago when he sold horses such as Hard Spun and Rockport Harbor, a multiple graded winner by Unbridled’s Song. But today, even big buyers such as Darley and Coolmore Stud are more likely to stand their own colts rather than get in bidding wars for outside ones.

“Unless you have a very sexy stallion with pedigree and a great race record, there aren’t any buyers today,” Porter said. “The sheikh’s not buying, and there aren’t many farms that are buying. Everybody wants to stand a good horse, but it’s very difficult to sell a stallion today.”

In 2009, Porter retired Old Fashioned, a 3-year-old Grade 2 winner by Unbridled’s Song, to Taylor Made.

“I ended up standing Old Fashioned myself because I couldn’t get an offer of any kind on him,” Porter said.

That’s working out well so far. Old Fashioned covered 124 mares in 2010, his first season at stud. He stood for $12,500 this year.

“The days of $30 million or $40 million horses are gone,” bloodstock adviser Tom Clark said. “Like everything else, the market for stallion prospects is contracting, and it’s feast or famine.”

Regional markets and many foreign markets also offer less opportunity than they did before the recession, Clark said. Mare numbers have dropped in many U.S. regional breeding programs, too, making those areas highly selective.

“Europeans haven’t bought an American horse to stand there in decades, and Japan only deals in Grade 1 horses, and they’ll take a proven horse,” Clark said.

The Koreans have bought from the U.S. market, but there is only a single government-run buyer, the Korea Racing Authority. India is a bright emerging market with multiple potential buyers, but, like others, it also keeps a firm lid on prices. For stallion prospect sellers, there is opportunity overseas, but finding a profitable match for a particular horse is challenging, agents said.

Porter said the slump in stallion-prospect prices hasn’t changed much about his operation, but adds, “I wouldn’t spend as much on a yearling colt today, because there’s too much risk in it. So I’m keeping the amount of money down for a colt as opposed to what I’d spend for a filly.”

One beneficiary of the slowdown in demand for stallion prospects: the racing fan.

“A lot of these horses are staying on the track,” said Ben Taylor, vice president of Taylor Made Stallions near Lexington, Ky. “It used to be, if you had a Grade 2 winner that was a pretty nice horse with some pedigree, people would get in line to show some interest. Now if you’re not a Grade 1 winner, you’re not going to go to stud anywhere in a major market, unless you happen to be a multiple Grade 2 winner that really showed talent, but then it’s not a cakewalk. You’ve got to work hard to get those stallions booked.”

As the active broodmare population dwindles, a few stallions – often proven sires – are attracting larger books, Taylor said. That takes even more mares off the table for the first-year stallion.

“Now you have the best horses breeding three times as many mares as they used to breed, and less mares to go around,” Taylor said. “That just adds more pressure, and if you’re not a very elite stallion or stallion prospect, you’re going to get flushed out of the market.”

The result is a buyer’s market for mare owners willing to take a chance on a young stallion. Stallion farms are offering much more generous terms to breeders now, including lifetime breeding rights for breeders who make multiyear commitments to breed to a new sire. Creative deals to entice breeders are the norm now. Because stallion deals traditionally revolve around the number of paid stud fees a stallion owner can expect, the changes in stallion marketing mean stud farms also must be creative in striking deals with colt owners.

“Those deals used to be a little bit boilerplate,” Taylor said of deals to secure stallions. “Now it’s just whatever you can think of. If you look at our agreements, all of them are different.”

Under some deals, a stud farm will buy into the horse. But under others, farms simply stand the horse for a management fee or breeding rights. Some grant the farm an ownership interest in the horse based on income projections.

“The owner has to be willing to stay in or the major farm that bought the horse has to be willing to stay in, unless he’s a super-hot horse, a no-miss, get-your-money-back-before the-foals-run guarantee,” said Clark. “This climate just makes the strong stud operations stronger. The market is there, but it’s contracting, and buyers are looking for terms from sellers so they don’t have to write the check themselves or go to the bank.”

Remaining heavily involved in their stallion prospect is a new concept for many racehorse owners who once hoped to cash out in multimillion-dollar stud deals when their colt’s racing days ended. But it’s a scenario that Porter, at least, said he no longer worries about.

“I’ll tell you one thing, I’m not afraid to stand a stallion myself anymore,” Porter said. “Taylor Made and I have gotten over 120 mares to Old Fashioned in both his years at stud. We worked hard on a program to entice breeders, and we’ve done very well. I would rather sell a stallion prospect if the prices were higher, but I would stand them myself now. I wouldn’t have thought of standing one before this.”