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Updated on 09/16/2011 8:36AM
Magna gambles on racing's future
There has never been a better time to be in the racing business.
That's the official view at Magna Entertainment, the Toronto-based company that already owns seven tracks and has leases on three others. The company has pending deals to buy Lone Star Park near Dallas and Flamboro Downs, a small harness track and slots casino in Canada, and is closing in on a deal to buy a majority share in Maryland's Laurel Park and Pimlico Race Course, home of the Preakness Stakes, for as much as $115 million.
Spurred by the vision of its chairman, Frank Stronach, Magna has quickly become the country's most aggressive racetrack operator. Magna tracks are already worth a half-billion dollars, card 1,200 Thoroughbred racing dates, and account for one-third of the U.S. Thoroughbred handle. The company has a new national account-wagering service, XpressBet, and plans to launch a national television channel, HorseRacing TV, sometime this year. No other company, including rival Churchill Downs Inc., which is following more traditional paths with its six racetracks, matches its size or scope.
And Magna shows no signs of slowing down. Magna officials say they will purchase as many as five tracks in the next several years. The company plans to renovate several of its existing tracks and equip them with concert areas and shopping boutiques, as well as build several new tracks. Magna wants to develop extensive offtrack betting networks, and company officials said they will spend millions of dollars on promotions to raise the company's Internet and telephone handle from $133 million in 2001 to a targeted $1 billion.
The plans are ambitious and will require costly investment, thousands of new customers, and deregulatory legislation in many states. "There has never been a company with a truly national presence, a global vision, and the will to attack the market potential," said Jim McAlpine, Magna's chief executive officer. "Well, MEC is such a company."
But other people, including several longtime racing officials and business analysts, contend that Magna is making a billion-dollar bet that may be difficult to cash. They say that Magna has consistently overvalued the tracks it has purchased and that some of them have struggled financially. They contend that neither Magna's projection for the growth of racing's fan base nor the company's goal of easing the regulations imposed by federal, state, and local governments is realistic.
Magna's health is critical to the horse racing industry, and if the company's plans fail, several of its tracks could be in jeopardy. Magna properties in California and Florida sit on valuable real estate, and it would be tempting to sell them in a crisis. But if Magna succeeds, the company will bring a new and far-reaching vision to the business, one in which racetracks become more like adult theme parks.
Magna already owns or operates Santa Anita Park in Southern California, Golden Gate Fields and Bay Meadows in northern California, Gulfstream Park in Florida, Remington Park in Oklahoma City, Thistledown in Cleveland, Great Lakes Downs in Muskegon, Mich., Portland Meadows in Oregon, Ladbroke at the Meadows, a harness track in Pennsylvania, and Multnomah Downs, a greyhound track in Oregon. The company has spent $350 million over the past three years to add to its portfolio and has another $146 million tied up in the Lone Star and Flamboro deals.
All told, the tracks give Magna more than 1,200 live Thoroughbred racing days a year, and more than 1,600 days including harness and dog racing. The goal, McAlpine said, is to have at least 2,000 annual racing days spread out to provide year-round content for the company's television channel, HorseRacing TV, which has yet to be launched.
Magna's acquisition strategy, McAlpine said, is based on the assumption that the company needs televised content. So Magna will continue to purchase tracks - and pay top dollar for them - based on tracks' ability to fill weak spots in the calendar. The tracks in Maryland, for example, would give Magna a year-round racing product that would strengthen the company's relatively lean months in the second half of the year. Lone Star would fill spots in the summer and fall.
McAlpine said that criticism of the prices Magna has paid fails to take into account the importance of the combined effect of all the tracks' signals when presented on one television channel.
"We can add value to our assets through the racing channel," McAlpine said. "The previous owners couldn't. They just had a couple or three racetracks. That's a huge opportunity [for us]."
According to filings with the Securities and Exchange Commission, made just before Magna's offer of 20 million shares of stock last April, most of Magna's tracks were losing money before they were purchased. Of the seven racetracks Magna bought that have previous financial records, only three - Bay Meadows, Gulfstream, and Ladbroke, the harness track - had a recent history of profitability. The other tracks, most notably Remington Park, were losers.
Santa Anita, for example, lost more than $11 million from 1996 to late 1998, the three years before Magna bought it, according to financial statements. Golden Gate was carrying four years of losses totaling $5.4 million at the time it was bought; Remington Park had lost a total of $27.3 million over a three-year period. Thistledown had lost $4.8 million.
Racing officials and analysts have said that the poor financial performances of the tracks could create a drain on cash at Magna that could seriously impact the company's projects, both now and in the future.
McAlpine declined to discuss the performance of individual Magna tracks, but said the tracks had generally performed "up to expectations."
The prices paid by Magna have generated a lot of talk in the industry. "All I can say is that there seemed to be a lot of happy sellers," said one racing official who worked at a track purchased by Magna.
Magna paid $118.6 million for Santa Anita, a price that Churchill officials said was out of line with their assessment of the business. Golden Gate cost $83.4 million. And even though the tracks were losing large amounts of money, Remington and Thistledown were bought as a package for $18.7 million (Remington's real estate was not included in the deal).
Churchill Downs passed on several of the tracks that Magna eventually purchased, including Gulfstream Park and Santa Anita, because of concerns about financial performance. Churchill has also dropped out of the bidding for the tracks in Maryland, citing concerns over pricing and state politics.
Several racing and accounting officials said that the prices Magna paid made sense if the company planned to develop the land underneath the tracks. But Magna officials have said they have no plans to tear down any tracks or sell the land, a point Stronach reiterated at a recent shareholders meeting. "We are not flippers," Stronach said, using a term for the rapid resale of assets.
Some Magna tracks were making money before they were bought by the company, according to the filings. Gulfstream Park, which Magna bought in September 1999 for $81.2 million in cash, had net income of $1.2 million, in 1998.
Bay Meadows was also profitable. In the first 11 months of 2000, a partnership set up by its owner, Paine Webber, had income before taxes of $9.2 million. In the year before Paine bought the racing operation, Bay Meadows had net profits of $2.25 million, the financial statements said, a more typical number for the track in the 1990's, according to one California racing official.
Magna bought Bay Meadows from Paine Webber for $24.1 million in November 2000, but received only the right to conduct racing at the track until the end of 2002, or for two years. Some racing officials have raised questions about the wisdom of the transaction. Even if Magna was able to increase before-tax profits by 50 percent to $12 million a year, the price the company paid did not make sense using traditional business standards. According to Magna's filings, Paine Webber paid only $8.7 million in late 1998 for the right to operate Bay Meadows in perpetuity, a price three times what Magna paid for the same assets.
McAlpine said the comparison wasn't "apples to apples," but he declined to go into details. He said the price for Bay Meadows was justified because Magna received the track's racing license. "We could transfer the racing license anywhere we want," McAlpine said.
The struggles of several Magna tracks may be reflected in the company's overall financial statements. In 2001, Magna had pretax net income of $1.3 million from its racing operations on revenues of $459.4 million, compared with pretax net income at Churchill Downs of $37.2 million on revenues of $427 million.
Ryan Worst, a gambling analyst with Dresdner Kleinwort Wasserstein Research, said that he recommends the Churchill stock to his customers.
"It comes down to the portfolio of assets," Worst said. "All of the Churchill tracks are making money. Not all of Magna's are."
When including revenues from Magna's real estate operations - a category that includes money made from selling non-racing real estate and $5.5 million in annual lease payments it receives from its former parent, the auto-parts company Magna International - Magna Entertainment had net income of $13.5 million in 2001, according to the financial statements. Combined net income was just $440,000 in 2000, when Magna had a pretax loss of $3.9 million from its racing operations but a $5.4 million gain from its real estate operations.
McAlpine said that Magna has already been successful at cutting costs from its racetracks and that the company expects its new account-wagering business to flourish in 2002, providing millions of dollars of revenue it did not have last year.
Through the end of May, handle through the company's XpressBet Internet and telephone betting system, which was launched at the end of January, was $21.2 million, according to figures from the California Horse Racing Board. The vast majority of that total was generated in March and April, when its Santa Anita and Gulfstream properties were running live. Average weekly handle during those months was $1.7 million.
But handle dropped off precipitously to $500,000 a week in May, while handle through XpressBet's competitors, Television Games Network and Youbet.com, soared. Each of those operations generated $2 million in handle a week in late May, according to the CHRB figures.
TVG, which is owned by Gemstar-TV Guide Inc., is supported by almost all of Magna's key competitors, including Churchill Downs and the New York Racing Association, which have signed contracts with the network giving it the exclusive right to broadcast their races to home viewers. Despite long negotiations, Magna refused to sign an access deal with the network, saying it preferred to go it alone.
McAlpine declined to comment on details about HorseRacing TV except to say that the company is now talking to cable and satellite operators. Magna's vice president of new media initiatives, Andrew Gaughan, did not return phone calls. HorseRacing TV was scheduled to launch in June, but no plans had been announced as of June 11.
TVG has a big head start on any Magna service. It is already available over cable systems in Louisville and Lexington in Kentucky, and in Baltimore and Los Angeles. Also, it is part of basic programming on the Dish Network satellite service. TVG's financial performance is indicative of the difficulty in starting a new network; it has lost at least $100 million since being launched three years ago.
Worst, the analyst said he doubts that Magna can make its racing channel a success without adding more popular tracks, even if it gets broad distribution.
"Just because people have access to the tracks, that doesn't mean they are going to bet on it," Worst said. "With the quality of racing that Magna's presenting, it's not clear everyone wants to bet year-round on their product."
Magna also wants to open more OTB's in states where it has tracks. Magna officials say they can create new fans by upgrading OTB's to make them more comfortable and inviting to families and casual fans.
The expansion of OTB's is tightly regulated by state commissions and legislatures so that rival tracks cannot poach customers by opening OTB's near their competitors.
Magna ran into problems last year in Florida when it tried to convince legislators that the state needed deregulation so that Magna could dictate where its signal could be sent. Steve Geller, the Florida state senator and point man for racing legislation in the state, said that of the 26 parimutuel facilities in Florida, Magna was the only one to oppose a 2001 bill governing offtrack betting.
"They want deregulation in some instances, and not in others," Geller said. "I kept trying to explain that to them, but they wouldn't listen."
In Southern California, Magna recently reached a deal to transfer Fairplex Park's fall racing dates to Santa Anita, but the plan has been opposed by the state's other racetrack operators and by California horsemen's group. Racing commissioners are currently contemplating whether to approve the dates transfer, but the case already illustrates the difficulties Magna will face as it tries to reshuffle racing schedules to best suit its needs.
At its racetracks, Magna plans to pour hundreds of millions of dollars into existing buildings or to tear them down. Gulfstream, for example, will be renovated next year with an entirely new grandstand that incorporates an adjoining concert area, a hotel, and shopping boutiques, at a cost of $150 million. A similar plan has been developed for Santa Anita, which has already gone through a $45 million renovation.
At Golden Gate, Magna submitted preliminary plans in late May to build a commercial and entertainment center on property it owns adjacent to the track, as well as for an expansion of the track's simulcast theater.
Magna also has plans to build tracks from the ground up. To deal with its expiring lease at Bay Meadows, Magna has purchased 225 acres of land in Dixon, Calif., approximately 20 miles southwest of Sacramento, and drawn up plans for a $150 million racetrack. Stronach has talked about building tracks in upstate New York and in Ocala, Fla.
All of these projects will take money, and lots of it. At the end of 2001, before the company reached the deals to buy Lone Star and Flamboro, Magna's balance sheet listed $39 million in cash; its long-term debt was $67 million. Magna officials said they also had $38 million in real estate left to sell.
In part to finance the Lone Star deal, Magna sold 20 million shares of stock in April, nearly doubling the amount of common shares available in the company. The offering raised $143 million, $30 million below Magna's projections. Magna reached an agreement at the beginning of the year for a $75 million line of credit.
Perhaps Magna's biggest and best hope for additional revenue is slot-machine gambling, which has contributed to dramatic turnarounds at tracks in Iowa, West Virginia, Delaware, and Canada. Slot machines have made political inroads in several states where Magna operates racetracks, including Ohio, Michigan, and Pennsylvania, but no legislation has been passed yet. Also, Maryland legislators have floated the idea of slots for several years, making the Maryland tracks all the more valuable.
Magna has already bought into one slots operation with Flamboro Downs in Hamilton, Ontario, a move that could generate nearly $11 million in revenue, according to figures provided by Graham Orr, Magna's chief financial officer.
However, Magna officials are sticking to their guns about racing being the only focus of the company.
"While others believe that the salvation of racing is slots and alternative gaming," McAlpine said, "we at MEC believe there is a strong future for racing as a wagering and entertainment business. But in order to realize that future, we need to correct the business fundamentals of the racing business as it is currently operated."