01/11/2010 12:00AM

Magna parent to assume assets


MI Developments, the parent company and largest creditor of the bankrupt racetrack company Magna Entertainment Corp., will take possession of Santa Anita Park, Gulfstream Park, Golden Gate Fields, and Magna's account-wagering company, XpressBet, after an agreement was reached with Magna's creditors' committee, several officials involved in the bankruptcy said on Monday.

The agreement, which was outlined to U.S. Bankruptcy Court Judge Mary Walrath in Delaware on Monday morning by attorneys for Magna and the unsecured creditors' committee, could allow Magna to exit bankruptcy in the next several months, according to the officials. Under the agreement, MI Developments would receive all the equity in the racing properties as a swap for money that Magna owes MI Developments. MI Developments is owed approximately $435 million by Magna, according to court filings.

The deal would settle a lawsuit filed by the creditors' committee last year, which contended that Frank Stronach, who controls both Magna Entertainment and MI Developments, had engineered loans from MI Developments to Magna despite knowing that Magna would later file for bankruptcy. The suit contended that the tactic allowed Stronach to put MI Developments in a favored position to take control of the tracks at the expense of other debt holders and shareholders.

Under the deal, MI Developments will pay Magna's unsecured creditors $76.5 million in cash plus $20 million from Magna's planned sale of the operating assets of Lone Star Park in Texas. In addition, the unsecured creditors will receive any proceeds above $20 million in a sale of Thistledown in Ohio and half of any proceeds above $20 million in a sale of Pimlico Race Course and Laurel Park. Laurel and Pimlico are scheduled to be auctioned on Jan. 21.

Magna's unsecured creditors are owed approximately $250 million, according to statements Magna has filed with the court.

"There will be significant distributions to unsecured creditors," Kenneth Eckstein, a lawyer for the creditors' committee, told Walrath at the Monday hearing, according to Reuters. "MID will essentially be sponsoring this plan and getting significant assets back as part of the reorganization."

Attorneys for the creditors' committee and Magna did not return phone calls from Daily Racing Form on Monday.

Magna has proposed various plans to raise money and pay down its debt since filing for bankruptcy protection last March, and most of those plans involved selling its properties at auction. Sales of the tracks have proceeded slowly, however, in large part because of uncertainty surrounding the future of the racing industry and the depressed commercial real-estate market. In addition, critics of Magna's plans, including several major shareholders in MI Developments, have contended that Magna has not seriously attempted to market its most high-profile tracks because of Stronach's desire to retain control of the those properties, especially Santa Anita and Gulfstream.

The new plan, which would need approval from the bankruptcy judge, resurrects the principles of a proposal floated by Magna at the time the company filed for bankruptcy. That proposal would have allowed MI Developments to take possession of Gulfstream and Palm Meadows Training Center in Florida, Lone Star Park in Texas, Golden Gate Fields in California, the bet-processing company AmTote, and XpressBet for a total consideration of $195 million. The proposal was withdrawn after major shareholders of MI Developments vowed to block the deal.

Opponents of the proposal included David Einhorn of the hedge-fund Greenlight Capital, which owns approximately 5.4 million shares of MI Developments. Einhorn and a spokesperson for Greenlight did not respond to phone calls on Monday.

Attaching a value to racing properties is a tricky proposition in the current market, and the process is often also complicated by local political considerations. For example, Magna's two Maryland properties would be worth far more to a buyer who believes that one or more of the tracks will receive a slot-machine license. In California, Magna's properties are difficult to value because of the number of questions hanging over the state's racing industry and its economy, as well as uncertainty over whether a real-estate developer would be able to raze the tracks anytime soon because of opposition from local zoning boards.

Transferring the properties to MI Developments would give the tracks the shelter of a publicly traded company that has relatively stable cash flows from its real-estate business, which derives most of its revenue from rents on properties owned by Stronach-controlled companies. According to one Magna official, however, the properties in the settlement are not universally profitable, and "this isn't going to solve all the problems." The official cited entrenched problems in the racing industry and the difficulties Magna has encountered in trying to make the tracks profitable on a consistent basis.

In addition to the three racetracks and the account-wagering company, MI Developments would take control of the Palm Meadows training center, which was built at a cost of over $120 million despite generating little revenue. MI Developments would also receive AmTote, the bet-processing company.

The settlement was disclosed on the same day that Judge Walrath was scheduled to begin a hearing into the unsecured creditors' committee's lawsuit, in an attempt to determine whether MI Developments should be prohibited from using a debt-equity swap in any bid for Magna's properties. Stronach provided testimony in a deposition for the lawsuit last week.

Magna had earlier proposed selling Santa Anita, Gulfstream, and the other properties during a February auction. Bids for the properties were scheduled to be due on Feb. 10, with the auction scheduled for Feb. 25. According to Reuters, Eckstein told Walrath that the formal agreement settling the lawsuit and transferring the tracks to MI Developments will be filed with the court by Feb. 12.

Magna has already reached deals to sell Remington Park in Oklahoma City and Lone Star Park in Texas for approximately $130 million. The company has received six bids for Laurel Park and Pimlico Race Course in Maryland, but officials have declined to disclose any other details about the bidding.

Trading in MI Developments was halted late on Monday morning after climbing 45 cents, or 3.3 percent, to $14.10. On Friday, the company's stock rose from $13.03 to $13.65.