08/09/2007 11:00PM

Magna could sell tracks to cut debt


Magna Entertainment Corp. will not rule out selling its racetracks as part of a plan to improve the company's financial performance and reduce a $500 million debt load, a consultant and former chief executive of the company said Friday.

Thomas Hodgson, who served as Magna's chief executive officer from March 2005 to March 2006, said during a conference call with analysts following the release of Magna's second-quarter results that there are "no sacred cows" among Magna's properties. Hodgson's consulting firm, Greenbrook Capital Partners, was hired on Thursday to conduct a "strategic review" of the company's assets.

"We're going to be doing a very comprehensive review that might well include actions with existing racetracks," Hodgson said.

Magna lost $23.7 million in the second quarter of 2007, bringing its losses over the past three years to approximately $325 million. Magna's auditing firm repeated in its analysis of the financial statements that Magna's ability to operate remains in doubt unless the company makes significant improvements to its results, a warning the company has made for the past three quarters.

Magna Entertainment, founded in 1998 by Thoroughbred owner and breeder and auto-parts manufacturer Frank Stronach, owns more racetracks than any other U.S. company. The company's properties include Santa Anita Park, Gulfstream Park, Lone Star Park, Laurel Park, and Pimlico Race Course, along with a handful of other minor tracks.

At the end of the second quarter, Magna had long-term debt and other long-term liabilities of $504 million. Interest expense in the quarter was $12.2 million, and the company had negative cash flow of $21.6 million.

Hodgson said that results of the strategic review would be presented to Magna's board in early September. He declined to be more specific about the plans for any of the company's racetracks.

As part of its plan to reduce debt, Hodgson said that Magna will "actively market for sale" several large properties in Michigan, Northern California, and Florida. The properties were all purchased in anticipation of building racetracks, but Magna has decided to abandon all those plans, Hodgson said, in efforts to reduce expenses and apply proceeds from the sale of the properties to debt reduction.

Earlier this year, voters in Dixon, Calif., rejected Magna's plans to build a racetrack there, and Magna has also been unsuccessful in its attempts to lobby for casino-type gambling in California. Those lobbying efforts have also failed in Michigan, where Magna was hoping to develop a large property just outside of Detroit.

Magna will also close a racetrack and casino in Austria, Hodgson said. Racing will cease at the facility at the close of the racetrack's meet in November, and Magna will then "evaulate other uses for the real estate," the company said in a release.

Over the last three months, Magna's stock has declined from a high of $3.50 to a low of $1.65, a price it hit earlier this week just prior to the announcement of the second-quarter loss.

Magna's difficulties over the past year are in part related to Gulfstream Park, where the company tore down the grandstand three years ago and rebuilt it at a cost of $140 million. After local voters approved slot machines at the facility, Magna spent an additional $40 million to build a casino at the property.

The slot machines at Gulfstream posted a net win of $80 per machine in the second quarter, an anemic number that is less than half of what slot machines are generating at two other Broward County facilities. Hodgson said that Magna has "no realistic prospect of generating an acceptable return on investment in the current operating environment" in Florida, and will seek to reduce the share of the revenue that horsemen receive from the machines.

Under the current agreement with horsemen, purses receive 7.5 percent of the revenue from the machines. Sam Gordon, president of the Florida Horsemen's Benevolent and Protective Association, said Friday that Magna officials had not yet approached the horsemen's group about renegotiating the deal. Asked whether horsemen would be willing to renegotiate, Gordon said, "I doubt it. Even at those numbers it's not our fault they're not making money."

Magna is headed by Stronach, who took the position of interim chief executive officer following the retirement of the company's most recent chief executive, Michael Neuman, who left the company after only four months in February. Hodgson said that Magna does not have plans to hire a permanent chief executive.

Stronach did not appear on the conference call. When an analyst asked for a reason why Stronach was absent, Hodgson said: "He's away."