01/21/2010 12:00AM

Magna deal gives a measure of stability

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If all goes according to plan, Magna Entertainment, the country's largest racetrack operator founded by Frank Stronach, will disappear later this year.

The demise of Magna Entertainment underlines the stark problems facing the racing industry. For the most part, racetracks cannot pay their bills by relying on racing alone and need subsidies from slot machines and entertainment to survive. Magna Entertainment, with its sprawling collection of racetracks and related corporate assets, was unable to reverse the trend.

However, a bankruptcy reorganization plan envisioned by Magna and approved by its unsecured creditors' committee may provide some much-needed, long-term stability for some of its most valuable racing assets by transferring them to MI Developments, Magna Entertainment's parent company and largest creditor. That's good news for the racing industry, because a fire sale of the properties could have set the stage for some of the tracks to be closed and redeveloped.

Under the deal, which was announced Jan. 11 to settle a lawsuit filed by the creditors' committee, MI Developments would receive Santa Anita Park, Golden Gate Fields, Gulfstream Park, Palm Meadows Training Center, the bet-processing company AmTote, the account-wagering company XpressBet, and Magna's 50 percent shares in HorseRacing TV and the simulcast-marketing company TrackNet Media. In exchange, Magna Entertainment's entire $450 million debt to MI Developments would be wiped out and, with it, the crippling debt service Magna would have owed. Approval of the deal is pending.

The unsecured creditors' committee - which represents businesses owed approximately $250 million - would receive at least $95 million in cash, $75 million from MI Developments and $20 million from the planned sale of Lone Star Park's racing assets. In addition, the committee would share with MI Developments half the amount of money over $20 million raised by the sale of Laurel Park and Pimlico Race Course in Maryland and all of the proceeds from a sale of Thistledown racetrack above $20 million.

The Maryland tracks are expected to sell for approximately $100 million in February at auction, though that price could fluctuate. Thistledown, near Cleveland, is likely to go back on the market because casino gambling efforts in Ohio have not met with conditions of an earlier sale of the track, which will probably be voided.

In a bankruptcy, it's hard to find winners, but one clear beneficiary is Stronach. He engineered the deals that used shareholder money from MI Developments to fund Magna Entertainment's racing operations by providing loans that Magna Entertainment may not have been able to get on the open market. Stronach controls both companies.

Those deals were the source of the lawsuit filed by the unsecured creditors' committee, which contended that Stronach was aware that Magna Entertainment was headed for bankruptcy at the time MI Developments provided the loans. According to the suit, the debts created by the loans allowed MI Developments to go to the head of the line for any proceeds in the reorganization. The suit sought to block MI Developments from using a debt-equity swap to bid on any of Magna Entertainment's racetracks. If the unsecured creditors had won the suit, MI Developments would have had to use cash to buy the tracks or place all the tracks on the market, with the proceeds eventually going to the unsecured creditors after the loans to MI Developments had been paid.

However, members of the unsecured creditors' committee began to grow skeptical that the sales of the tracks would raise enough money to pay off the entire loan debt to MI Developments, according to a member of the committee who asked not to be identified because he was not authorized to speak on the committee's behalf. As a result, members of the creditors' committee believed their debt was virtually worthless without a deal. Now, according to the committee member, the unsecured creditors, which include banks that loaned Magna money, could get 50 to 60 cents on the dollar.

The tracks that would go to MI Developments would get a new lease on life.

Santa Anita and Golden Gate anchor the struggling California racing circuit, which is suffering from short fields and uncertainty over the fate of Hollywood Park, the Inglewood track that may be closed soon and redeveloped. Golden Gate is the only major racetrack still operating in Northern California after the razing of Bay Meadows south of San Francisco in 2008.

In south Florida, Gulfstream and the Churchill Downs Inc.-owned Calder Race Course divide the year-round Thoroughbred racing dates. Gulfstream conducts the shorter, higher-profile meet and serves as a winter home for many East Coast horsemen seeking to give their 3-year-olds a foundation leading into the Triple Crown races.

According to Magna Entertainment officials, Santa Anita and Golden Gate are profitable, though the profits are marginal. And although Gulfstream Park has had widely publicized problems getting profits out of its casino, the track and casino together are "at least break-even," according to its general manager, Ken Dunn.

Under Magna Entertainment, the three tracks were dragged down by the cash the company was paying to service its debt, an amount that included the $170 million Magna spent tearing down and rebuilding Gulfstream. With those costs out of the equation, the tracks should be far more stable.

Although MI Developments derives the majority of its revenue from leases on properties owned by Stronach's publicly traded companies, it would also have assets that it can market if the company faced a cash squeeze based on the racing operations. Those include XpressBet, the account-wagering company, which could be valuable to potential buyers such as Churchill Downs Inc. as it seeks to consolidate the online betting market.

In the end, Magna Entertainment's demise should be a cautionary tale for the racing industry. Sales of its racetracks have so far been based almost solely on the tracks' values as casino operators or the potential to operate casinos. It's unlikely that Santa Anita or Golden Gate will receive casinos anytime soon, and Gulfstream's casino continues to struggle in a competitive market. As MI Developments picks up the baton from Magna Entertainment, it will find that making a racetrack profitable in this day and age is still a difficult proposition.