Updated on 09/16/2011 8:47AM

Mad genius or merely mad?

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WASHINGTON - When Magna Entertainment Corp. buys a major interest in the Maryland Thoroughbred racetracks - a deal that appears imminent - the Canadian company will add to its powerful position in American racing. It already operates important tracks from Gulfstream Park in Florida to Santa Anita in California, and soon it will run one of the nation's most famous races, the Preakness at Pimlico.

Magna has been busily acquiring racetracks for the last four years, spending hundreds of millions of dollars in an effort to become the dominant player in its industry. This is not unusual corporate behavior, of course; all types of companies seek strength in numbers that gives them an advantage over their competitors. That's straight out of Economics 101.

But even students in Econ 101 might justifiably ask if Magna has a rational, workable plan. Magna is paying so liberally for its acquisitions - including Pimlico and Laurel Park - that it may not be able to mold them into a profitable empire. The U.S. economy is strewn with examples of once-powerful companies (in telecommunications, especially) that spent too much money in an effort to grow and wound up in worse shape than a busted-out horseplayer. But Magna's chairman, Frank Stronach, has a vision and a conviction that he can succeed in an industry that produces relatively few success stories.

Stronach's skeptics and critics in the racing industry outnumber his admirers, but even the doubters have to respect his overall business record. A native of Austria who immigrated to Canada in 1954 and opened a small tool-and-die shop, he built his business into one of the world's biggest auto-parts supplies, Magna International.

Stronach made some missteps - Magna found itself overloaded with debt in the 1980's - but he kept trying to expand his business and did so with a series of European acquisitions in the 1990's. Although Magna may not be a household name, its products are ubiquitous. According to Hoover's Company Profiles, a typical car made by General Motors, Ford or DaimlerChrysler contains $200 to $1,000 worth of Magna parts.

Stronach's passion is horse racing, and after he started to buy racetracks, it was predictable that he would think big and act aggressively. He spun off his racetrack operations into a separate company, Magna Entertainment, which now owns, leases or has pending deals to buy 14 racetracks. Company officials say they aim to make several more acquisitions after the Maryland deal is done.

But the prices paid by Magna raise eyebrows throughout the industry. How much is too much? Washington Post investment columnist James Glassman said that, as a rule of thumb, "You ought to get a gross return of 10 percent a year less your interest costs." Thus, if a buyer spends $100 million for a company, he might aim to make $10 million a year, spend $6 million in interest and net $4 million. If such returns aren't feasible, Glassman said, "You might as well take the money and buy a bond."

Magna is expected to spend more than $100 million for the Maryland tracks. For this sum, Magna will get a company whose business has been in the doldrums for years and which reported a net profit of $1.49 million for 2001. Without the Preakness, the Maryland Jockey Club wouldn't make any money at all. Even to a layman, the purchase price looks awfully high.

And it looks that way to others in the industry. Magna has one serious competitor in the racetrack-acquisition game, Churchill Downs Inc., whose properties include Hollywood Park and Arlington Park. But Churchill hasn't been able to keep pace with Magna. "We're required by our board to be disciplined spenders," said Bob Decker, Churchill's chief financial officer. "We've gone head to head with [Magna] and for whatever reasons - I'm sure they're strategic - they're willing to pay much more than we are."

So what is Magna's strategy for making these expensive investments work? It is not what outsiders would guess. Plenty of investors are eager to buy racetracks if they suspect that the legalization and installation of slot machines will generate windfall profits. Yet Stronach seems indifferent to the promise of slots. He believes in horse racing.

He believes that racetracks can expand their live business by becoming more fan-friendly and offering amenities that appeal to an audience beyond the hard core. (At Santa Anita, he opened a classy restaurant. At Gulfstream Park, he envisions a range of non-racing attractions including cafes and a concert pavilion.)

While it may be possible for an inspired track operator to nudge attendance upward, racing's best chance for survival and prosperity is to bring the product to its customers. Magna is positioned to do so. It operates a telephone-wagering service, Xpress Bet, owns a share of the Racetrack Television Network and plans to develop a national television channel, HorseRacing TV. A racing fan could sit in the comfort of his living room, watch a continuous slate of action from Magna tracks and phones his wagers into Xpress Bet. But to make that vision a reality, Magna needs an abundance of races to offer, and Maryland - with a virtually year-round circuit - will give the company a significant supply of the racing product.

A few years ago, optimists predicted confidently that bringing the product to customers' living rooms would revive the Thoroughbred industry. In a gambling-crazed country, horse racing could become the most convenient, accessible gambling game.

But as it has pursued this goal, the industry's experiences have been sobering. Most of the non-Magna heavyweights in the sport threw their support behind an ambitious television venture, the TV Games Network, which has taken a financial bath. Another TV racing network went out of business. At the same time, legal telephone-wagering operations have faced vicious competition from offshore operators who can siphon away the best customers by offering rebates. A bettor watching a day of Magna racing from his living room can phone his wagers into the Caribbean.

The perils of the Magna strategy are evident. It may pay too much to establish a racing empire and find that the returns from television and telephone betting don't begin to repay the investment. Not only would Magna suffer financially, but so would its racetracks - just as local manufacturing plants may shut down because of the financial woes of a distant corporate owner. When Magna takes its gamble by spending more than $100 million for the Maryland tracks, everyone involved in Maryland's racing industry will be sharing the risk and praying that Stronach's grand vision is a realistic one.

(c) 2002, The Washington Post