02/16/2009 12:00AM

Laurel slots a no-win bet for Magna

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WASHINGTON - People connected to the Maryland racing industry - owners, trainers, breeders, employees, and fans - are in a state of shock and disbelief. For years, they hoped that the legalization of slot machines would rescue the suffering sport; on Election Night they celebrated the passage of a referendum that approved slots and channeled money into racing purses. And then last week Marylanders learned the stunning news that the owner of Laurel Park and Pimlico failed to post the requisite $28.5 million payment before the deadline to obtain a license.

The state's slot board disqualified the bid of Magna Entertainment Corp., the parent company of the two tracks. As a result, a slot-machine facility will be built near the Arundel Mills shopping center instead of at Laurel, and years of efforts by the Thoroughbred industry will go down the drain.

"We were blindsided," said Alan Foreman, counsel of the Maryland Thoroughbred Horsemen's Association, who then asked the question on everyone's mind: "Where do we go from here?"

He did not have a good answer, nor is there a good explanation for this debacle. Magna is a troubled, dysfunctional company, run largely according to the whims of its chairman, Frank Stronach. Its business decisions have frequently been disastrous; it is more than $400 million in debt; its Nasdaq-listed stock is selling for 61 cents a share. The decision to submit an application without the $28.5 million came from the company's Canadian headquarters just minutes before the slot applications were due in Annapolis. Magna offered the dubious explanation that it was concerned about getting the money back in case zoning challenges halted the development at Laurel. Some observers speculated that the struggling company simply didn't have the necessary cash.

There is another possible explanation, too. Magna might have made a rational decision - it was being asked to ante $28.5 million to get into a game it couldn't win.

The slots legislation in Maryland gives such a big share of revenue to the state - 67 percent - that slot operators would have trouble making a profit. (The drafters of the legislation must have been reading the years of Washington Post editorials deploring giveaways to "greedy track owners.") That's why there were only four proper bids for five slot licenses in the state, and the lone bid for a Baltimore operation was a minimal one.

Moreover, no slot operator would get a worse deal than Magna. When it bought Laurel and Pimlico from Joe DeFrancis, the company not only paid an inflated price, but it ceded to DeFrancis a big chunk of any future slot profits. So after the state took two-thirds of the revenue and left Magna with a one-third share, Magna would have to split that slice of the pie with DeFrancis, and split it again with a partner who would run the slot operations, leaving a few crumbs. Then the company would have to borrow millions of dollars to develop the Laurel property. With the general economy and the entire gambling industry in a downturn, this venture was going to be a disaster for Magna.

In its search for a partner, Magna had been in discussions with the Baltimore-based Cordish Cos., operator of the fabulously successful Hard Rock Casino in Miami and many other developments. When the negotiations fell apart, Cordish decided to make its own bid. The legislation authorizing slots specified that one of the sites was to be in Anne Arundel County, within two miles of Route 295 - a description clearly aimed to put the facility at Laurel. But the description also applies to Arundel Mills. Cordish put in a bid for that site and must have been shocked when it won by default, after Magna's defection.

So what happens to Maryland racing now?

The slots legislation earmarks 7 percent of revenue from all slots in the state for purses money and awards for breeders. The absence of slots at Laurel doesn't change that fact. If the Arundel Mills slot parlor is successful, horsemen in the state will benefit - as long as they have a place to run their horses.

Laurel is badly in need of major renovation. The slots legislation earmarks 2.5 percent of revenues for physical improvements at the track - as long as the track operator puts up matching funds. But Magna would have scant incentive to spend money refurbishing a slotless Laurel. John Franzone, chairman of the state racing commission, said, "We may have top-tier racing [with the slot money], but I'm not happy about the idea of being in the same Laurel grandstand 10 years from now."

Franzone may be guilty of starry-idea optimism in assuming that there will be a Laurel Park in the near future, let alone 10 years. If Magna declares bankruptcy, or if it starts selling properties to raise cash, Laurel Park would have plenty of real estate value, but no one would want it as a racetrack.

"There is no white knight out there," Foreman said. "What's the value of Laurel without slots?"

Pimlico will survive because either Magna, another owner, or the state will ensure that the Preakness survives. Pimlico could run a springtime race meeting that lasts a few weeks, but that decrepit old barn is not suitable, physically or geographically, for year-round racing.

So even if money from slot machines does increase purses and improve the quality of the races, there isn't going to be a decent place to run those races. Magna can't afford to build one; no white knight will appear; and the state government will probably have little desire to help an industry that can't help itself.

(c) The Washington Post, 2009