04/19/2009 11:00PM

Magna, parent drop plans for bid


Magna Entertainment Corp., the bankrupt racing company, abandoned a plan on Monday to give its parent company and largest creditor, MI Developments, the opening bid in an auction of a bundle of its racing properties, according to the companies and filings in bankruptcy court.

The decision to drop the plan was outlined in a news release and court filing just before a scheduled hearing Monday morning in front of U.S. Bankruptcy Court Judge Mary F. Walrath in Delaware. Magna's attorneys said that the company will file an amended plan to auction its properties prior to a scheduled hearing on May 7.

By abandoning the plan, Magna will likely face increased pressure to sell some of its high value tracks like Santa Anita Park. The plan would have allowed MI Developments to submit a stalking-horse bid of $195 million for the properties, but the bid included a $136 million credit on a $371 million debt that Magna Entertainment owed to MI Developments.

The stalking-horse bid had been attacked by creditors of Magna Entertainment and some shareholders of MI Developments. One large minority shareholder, Greenlight Capital, contended that the plan would "chill bidding and raise issues regarding the debtors' ability, if not willingness, to discharge their fiduciary obligation to maximize value for creditors and shareholders."

Both Magna Entertainment and MI Developments are controlled by Frank Stronach, the owner-breeder who founded Magna in 1998 using money from his publicly traded auto-parts company, Magna International.

MI Development's chief executive officer, Dennis Mills, acknowledged in a statement released Monday that the company had agreed to drop the plan because of "objections raised by a number of parties" to the bankruptcy process.

"We made our stalking-horse bid because we believe [Magna] owns some very valuable and attractive assets," Mills said. Mills added that MI Developments will "continue to be interested in acquiring assets" from Magna.

Under the stalking-horse bid, MI Developments would have offered $195 million for Gulfstream Park, Golden Gate Fields, an operating lease and the racing assets of Lone Star Park, Palm Meadows Training Center, the bet-processing company Amtote, and the account-wagering company XpressBet. Other parties would have had the ability to bid on the bundle or individual properties within the bundle, though officials who are involved with marketing the assets said that Magna would not provide separate valuations for the individual assets or the price at which MI Developments had valued the separate assets.

The $195 million bid included $44 million in cash. The rest included the forgiveness of $136 million in debt and the takeover of an unidentified lease valued at $15 million. But under the auction procedures Magna was asking the court to approve, no other bidder could include credit in their bids, a provision that critics attacked as unfair to other parties.

According to an official involved in the bankruptcy planning but who is not authorized to discuss the plans publicly, the decision to drop the stalking-horse bid was made by the boards of both companies over the past three days and supported by the creditors' committee, which also filed an objection to the plan.

Although plans have not been finalized about how to sell the properties, Magna will likely seek to auction off all the properties as individual assets, the official said. In addition, the official said that it is almost certain that Magna will be forced to sell Santa Anita Park, Laurel Park, and Pimlico Race Course to pay its debt to MI Developments. Pimlico is the host track of the Preakness Stakes, the second race of the Triple Crown. Both Pimlico and Laurel are in line to receive tens of millions of dollars annually in slot-machine subsidies.

"You could see $200 million to $250 million in profits off those sales," the official said. "That has to be done to pay off the debt."

The official also said that the new bidding procedures may restrict MI Developments from making a bid on any of the assets.

Magna filed for bankruptcy March 5. Since then, many racing officials and critics of the auction plans have said that the plan to auction off the properties using the stalking-horse bid would have paved the way for Magna to transfer the properties to MI Developments at the expense of the company's shareholders. Stronach has frequently been the target of criticism from activist shareholders for using company money to pay for his own personal projects.

Magna and MI Developments also said in court filings Monday that they expected to ask the court for approval for $38.5 million that MI Developments would provide to Magna as debtor-in-possession financing, which is used by bankrupt companies as operating cash during reorganization. MI Developments had earlier agreed to provide a total of $62.5 million in financing to Magna, but a number of parties filed objections to the size of the amount.

The court has already approved the distribution of approximately $16 million of the money requested. The Monday filing also said that MI Developments would seek to have the due date extended for the financing by two months, to Nov. 6, 2009, "to allow for a longer marketing period in connection with [Magna's] asset sales."