11/09/2005 12:00AM

Magna eases big debt by selling harness track


Magna Entertainment Corp. has reached a deal to sell The Meadows harness track in Pennsylvania for $225 million in cash, a move that significantly shores up the company's balance sheet but also deprives Magna of a chance to profit from lucrative revenue streams when slot machines are eventually installed at the Pittsburgh-area track.

Magna announced the deal on Wednesday, the same day it released its third-quarter results for 2005. During the quarter, Magna lost $34.5 million, or 40 cents a share, compared with a loss of $50.3 million during the same quarter in 2004.

With the quarter's results, Magna - the largest racetrack operator in the U.S. - has now lost $280 million over the past 3 3/4 years. Earlier this year, the company said it would focus on reducing its debt and restoring positive cash flow by selling properties.

According to the company's financial documents, Magna had negative cash flow of $9.2 million in the third quarter, a significant improvement over the third quarter last year, when Magna went through $37.3 million in cash. During the quarter, however, Magna took on an additional $56 million in debt from its parent company.

For the year, Magna has had negative cash flow of $24.4 million, compared with a negative cash flow of $56.1 million through the first nine months of 2004. Proceeds from additional debt to its parent were $76.1 million during the nine-month period.

Revenues in the third quarter were $83.2 million, down 12.4 percent compared with the third quarter last year. The results this year do not include revenues from two former Magna operations, Bay Meadows in the San Francisco area and Multnomah Greyhound Park in Oregon. Magna's leases on the two tracks expired at the end of 2004.

The deal to sell The Meadows and its five offtrack betting parlors to Millennium Gaming, a partnership owned by Las Vegas casino operators William Paulos and William Wortman, and a Los Angelos investment company called Oaktree Capital Management, will not close until the racetrack is awarded a license to operate slot machines. Slot machines were legalized at 14 sites in Pennsylvania last year, including eight racetracks. The process to license specific sites has bogged down since then, though it is likely licenses will be awarded in mid-2006.

Thomas Hodgson, Magna's chief executive officer, said during a conference call with analysts Wednesday morning that the company regretted selling The Meadows, considering the revenues that casinos can provide, but he also said that Magna would have needed to shell out an additional $250 million to construct the casino and purchase the slot-machine license on its own, a nearly impossible task given the company's cash position and its current debt load.

"This was really almost a half-billion-dollar decision," Hodgson said. Magna will continue to manage the racing operations at the track and OTBs for five years.

Hodgson said that proceeds from the sale of The Meadows will go toward reducing Magna's debt. As of Sept. 30, the end of the quarter, Magna had $266.9 million in long-term debt, and $220.1 million due in the form of convertible notes.

The deal to sell The Meadows comes on the heels of several other cash deals. Last week, Magna announced an agreement to sell 157 acres of land adjacent to its Palm Meadows training center in Florida to a real-estate developer for $51 million. Magna also closed a deal on Oct. 19 to sell Flamboro Downs in Canada for a total of about $66.1 million, and on Sept. 30 the company sold a management company that oversaw the operations of Colonial Downs in Virginia for $6.8 million in cash and a $3 million promissory note.

The land deal in Florida is not expected to close until the first quarter of 2006, but the Flamboro deal will impact the company's fourth-quarter earnings, traditionally a slow period for Magna.

Magna was initially scheduled to release its third-quarter earnings last week, but the company delayed the announcement until Wednesday morning. Since the announcement was delayed, Magna's stock jumped from approximately $6.60 to $7.61, a 52-week high. On Wednesday, Magna's stock closed at $7.66, up 8 cents, or 1 percent, from Tuesday to a new 52-week high.

Hodgson said that the earnings announcement was delayed because of pending negotiations over the land sale in Florida and the sale of The Meadows.