09/14/2007 12:00AM

Magna plan worries industry

EmailThe plan announced Thursday by Magna Entertainment Corp. to eliminate approximately $750 million in debt by the end of 2008 underscores difficult questions about the future of Magna's racetracks and the company's ability to remain a viable racing entity, racing officials said Thursday and Friday.

Though Magna has so far publicly identified only three of its smaller racetracks for sale, the company has little chance of eliminating its debt without reaching deals to sell at least some of its marquee properties, the officials said. Magna, the country's largest racetrack operator, owns a dozen racetracks, including Gulfstream Park in Florida, Santa Anita Park and Golden Gate Fields in California, and Laurel Park and Pimlico Racecourse in Maryland. Those properties are all believed to generate positive cash flow or break even, but the properties also are believed to be far more valuable as development sites.

"The biggest concern to the racing industry is that whatever happens to these properties is that they continue to be racetracks," said Chris Scherf, executive vice president of the Thoroughbred Racing Associations, a racetrack trade group. "Magna has some terrific real estate, but the problem with that terrific real estate is that it's terrific only for other development."

Most of those properties do have some protection from the bulldozer, and, according to one official who is familiar with Magna's strategy, the company's main focus will be to strike partnerships with companies that are willing to purchase minority stakes in either the tracks or in existing or potential casino operations. Under this strategy, Magna would not have to eliminate the entire debt but get down to a "manageable level" of approximately $150 million, the official said.

Among the protections, Santa Anita Park is in the town of Arcadia, near Los Angeles, and the Arcadia city council has steadfastly refused to entertain any talk about tearing down the landmark track, which was built in 1933. Gulfstream Park has a license to operate slot machines that is tied to its racing license, and the value of Laurel Park and Pimlico Racecourse as racing operations has a premium attached to it because of the state Legislature's willingness to discuss the legalization of slots at restricted sites, including racetracks.

The downside is that the company cannot get full value for many of the properties from a pure real-estate valuation. Santa Anita Park's 320-acre property in the heart of Arcadia is worth perhaps $500 million. Property prices have increased by 400 percent in the town since Magna purchased the track for $126 million in 1998. But using the track's racing cash flow as a basis for determining the property's value probably would not get Magna any more than the original purchase price.

The value of Gulfstream Park, which Magna tore down and rebuilt at a cost of more than $200 million, could actually benefit from the poor performance of the track's slot machines, which are generating approximately $100 a day, far below initial estimates. An ambitious casino developer could decide to make a play for the track and casino, but for now, any buyer who looks at the financial statements for Magna's Florida operations will find a highly encumbered property that is losing money.

Another potential property for development is Palm Meadows, the 304-acre training center north of Gulfstream in Boynton Beach that Magna built for $90 million in 2003.

In Maryland, Laurel Park is halfway between Baltimore and Washington, an area that has been built up extensively over the past 10 years. Pimlico, on the other hand, is in a depressed area of Baltimore. The value of the two tracks, which are struggling to break even, depends on whether slot machines will be legalized and, if so, how the revenues would be divided. According to a Maryland racing official who spoke on the condition of anonymity because of his close ties to Magna, any bill to legalize slot machines is not expected to be generous to the racetrack owners, who have made as many enemies as friends during aggressive lobbying campaigns to get approval for the machines.

"The problem is that [Magna is] not going to be able to call the shots on that bill," the official said, adding that he believed the chances were good for slot machines to be legalized either this fall or early next year because of an expected $1.5 billion budget shortfall in the state.

Golden Gate Fields is another matter. The Northern California market is in disarray, with Golden Gate's sister track, Bay Meadows, expected to be open for only another year or two. Frank Stronach, the founder of Magna Entertainment, acknowledged during a conference call Thursday that Golden Gate's value as a racetrack was "not in line" with its value as real estate, indicating that Magna may be seriously considering unloading the track no matter what the consequences for racing on the circuit.

Magna officials did not return phone calls on Thursday or Friday, and during the conference call Thursday they declined to give their own valuations of the tracks, citing the company's need to negotiate those prices in confidence, a standard business practice.

Magna officials said they would explore the sale of the company's interests in pending retail developments on small portions of the Santa Anita and Gulfstream properties, but it's unclear what those sales could generate. Magna's contribution to the deals was the use of the land, which could mean that Magna could raise relatively sizable amounts of cash for debt reduction with little racing impact by an outright sale of the lots to the developers, Forest City at Gulfstream and Caruso at Santa Anita.

The problem for Magna is that while any outright or minority sale of its profitable properties will help in reducing debt, the sale of those assets will remove revenues from the company's cash-flow and income statements. In other words, Magna's best strategy to strengthen its balance sheet is its worst strategy to turn the company into a profitable enterprise. Over the past three years, the company has lost $350 million.

Thomas Hodgson, the former Magna chief executive who has been hired to oversee the debt-elimination strategy, said on the conference call Thursday that he was confident the company would be "cash-flow positive" in 2009. The question for the racing industry is how Magna will get there and what toll it will take.