03/05/2009 1:00AM

Magna files for Chapter 11 bankruptcy

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Magna Entertainment Corp., the country's largest racetrack operator, filed for Chapter 11 bankruptcy in a Delaware court on Thursday and has reached an agreement to sell the majority of its racing assets, including Gulfstream Park and Golden Gate Fields, to its parent company and largest creditor, MI Developments.

Magna announced the filing in a statement and said the bankruptcy will not jeopardize any of its ongoing race meets, including those at Gulfstream, Golden Gate Fields, and Santa Anita Park, which on Saturday will host the Santa Anita Handicap, the track's biggest race. As part of its bankruptcy filing, Magna said it had reached a separate agreement with MI Developments to obtain $62 million in debtor-in-possession financing that would provide Magna with the cash it needs to continue operating while reorganizing under the protection of the court.

"This is a voluntary filing intended to utilize a Chapter 11 process that will allow us to continue to operate the business uninterrupted while we implement a reorganization in a court-supervised environment," Magna's chairman and founder, Frank Stronach, said in a statement. "We expect that all employees, customers, and horsemen will continue to be paid in the normal course."

Officials at Santa Anita and Gulfstream declined to comment.

Magna had been expected to file for bankruptcy protection since late February, when the company announced that MI Developments had scrapped a spin-off plan that would have delayed the due dates of approximately $200 million in debt. As a result of canceling the plan, Magna was placed in jeopardy of defaulting on all of its loans beginning on Thursday because of covenants within the debt agreements.

The fate of several Magna racetracks is now unclear, particularly the ones that may be sold to MI Developments under the agreement announced with the bankruptcy filing. Other racetracks, such as Santa Anita Park, appear to be relatively safe. Magna's bankruptcy adviser, Miller Buckfire and Co., has been asked to seek the sale of all of the company's racing assets as a part of the reorganization, according to the company's statement.

Regardless of the reorganization, the sales agreement with MI Developments, if approved by the bankruptcy court, will leave Magna Entertainment a shell of its former self. The only assets not covered by the agreement include Santa Anita, Laurel Park and Pimlico Race Course in Maryland, and two other companies, a television network and a simulcast marketing partnership, both co-owned with Churchill Downs Inc. Several other Magna assets, such as Remington Park in Oklahoma and Thistledown in Ohio, remain under the control of the company, but Magna has already classified those operations as having been taken off the books.

The deal with MI Developments is similar to a foreclosure, considering the debt Magna owes to the company and the structure of the sale agreement. The deal includes Gulfstream Park, Palm Meadows Training Center, and a real-estate development adjacent to Gulfstream in Florida; Golden Gate Fields in Northern California; the operating assets of Lone Star Park between Dallas and Ft. Worth; AmTote, a bet-processing company; and XpressBet, a national account-wagering company.

Under the deal, MI Developments will pay $44 million in cash for the assets, take over the rights to a $15 million lease, and give Magna a credit of $136 million on its debt to MI Developments. The agreement has been called a "stalking-horse bid," meaning that any other party may offer a bid for the same assets at a better price. The bids will be overseen by the bankruptcy court.

Two of the properties included in the agreement, Lone Star Park and XpressBet, were not included in the bankruptcy filing, according to Magna and Lone Star. Both assets have potential to buyers - XpressBet has tens of thousands of customers, and Lone Star, which is profitable, has an outside chance of getting legislative or voter approval to operate slot machines within the next several years.

If the stalking-horse bid is accepted and approved by the bankruptcy court, MI Developments will likely attempt to dispose of the assets through a sale or outright closure. Several buyers in the racing and gambling industries may line up to purchase the tracks at what may be fire-sale prices - including Churchill Downs Inc., which has little long-term debt and a strong balance sheet - but any efforts to sell the tracks will be hindered by the current economic environment.

Although the collapsing real-estate market and tightened credit conditions were a factor in creating Magna's bankruptcy, the company embarked on a number of projects that have played a prominent role in its financial problems. Most significantly, Magna spent approximately $250 million to tear down and rebuild Gulfstream Park into a racetrack and slot-machine casino in 2005 and 2006, using money borrowed from its parent company even though the old track was still functional and profitable. Also in Florida, Magna spent $90 million to build a state-of-the-art training center that has been praised by horsemen but has failed to contribute significantly to the company's operating revenue. Under a push from Stronach, a native of Austria, Magna also built a lavish casino and racetrack outside of Vienna that opened in 2004, never turned a profit, and was closed last year.

Magna Entertainment, which was founded in 1998, appeared to overpay significantly for many of its racetracks, according to racing officials, and suffered from a high rate of management turnover. Most recently, the company failed to pay a licensing fee to the state of Maryland to bid for slot machines at Laurel Park, and although Magna has challenged in court the state's requirement for the fee, the failure suggested that the company could not afford to pursue vigorously its last, best hope to turn around its fortunes. A competing company filed a bid for the only license in Laurel Park's county, and Laurel's chances of receiving a license, even under another owner, appear slim.