10/01/2008 12:00AM

Magna's stock continues to plunge


Shares of Magna Entertainment Corp., the large racetrack company that owns Santa Anita Park, continued to decline on Wednesday to a new low after a 56 percent plunge on Tuesday that resurrected concerns about the future of the company.

Magna's stock closed on Wednesday at $1.61, down 8 percent, or 14 cents. On Tuesday, the stock traded as low as $1.50 before settling at $1.75. Earlier this year, Magna authorized a 20-for-1 reverse split of its stock to meet minimum share-price requirements on the Nasdaq exchange. The closing price Wednesday was the equivalent of 8 cents a share under its pre-split pricing.

The Tuesday plunge - the largest of the day on Nasdaq - occurred even as the Dow Jones Industrial Average and Nasdaq rebounded strongly after heavy losses on Monday. Other racing-related stocks were also up on the day.

Magna's stock has lost nearly 80 percent of its value since July and nearly 99 percent in the past two years. The company has lost more than $500 million over the past five years, holds $500 million in debt, and has negative cash flow of $190 million over the past three years, when not counting cash provided by loans or lines of credit.

No single factor pointed to the sharp decline on Tuesday, and the company did not make any announcements. Magna officials did not return phone calls Wednesday, although one official with close ties to the company said that officials there were bewildered by the sudden drop.

For 18 months, the company has been attempting to reduce its debt by selling racetrack properties, but aside from a $5 million deal to sell Great Lakes Downs, an unprofitable racetrack in Michigan, no deals have been reached. With credit markets drying up and without a clear way for the company to reduce its debt or reverse its cash flow, it is not clear how the company will be able to get out of its hole without a bankruptcy filing.

Six racing officials interviewed over the past week said that Magna does not appear to be seriously interested in selling its most valuable tracks. Instead, it has offered to sell stakes in the tracks but could not attract interest from any buyers, several of the officials said.

"They've been asking for millions of dollars for partnerships, but those partnerships aren't very well defined," said one racing official.

Magna, which was founded by Frank Stronach, the owner-breeder, has reached multiple extensions this year on the payment of $230 million in debt that began to come due in the spring. The vast majority of that debt, $190 million, is held by its parent company, MI Developments.

MI Developments and Magna have tried to work out a deal where the debt would be unloaded to a jointly owned company, but the deal was scuttled when several large shareholders criticized the plan as an overly generous payoff to Stronach.

In addition to Santa Anita - where the Breeders' Cup will be held for the next two years - Magna owns Gulfstream Park in south Florida, Golden Gate Fields in Northern California, the racing assets of Lone Star Park in Texas, and Laurel Park and Pimlico Racecourse in Maryland, among other holdings. The company also is a partner with Churchill Downs in a simulcast-marketing company, TrackNet, and a television broadcasting company, HRTV. It owns the account-wagering company XpressBet.

The value of Magna's marquee holdings is difficult to ascertain. Racetracks that do not have slot machines continue to produce revenue numbers per square foot that are not strong, drawing little interest from potential buyers. In addition, buyers looking to acquire tracks for pure real-estate development face a multitude of zoning hurdles to tear them down, not to mention further complications caused by the crash of the real-estate market and difficulty in getting financing.

"Even if you wanted any of these tracks for the land, how long would it take you to get anything done with it, even if you could?" said one racing official who, like others, did not want to be identified because of contractual ties to the racing company.

The Maryland tracks would seem to be in play because of a November referendum asking voters to approve slot machines at five undetermined sites in the state. If voters approve the referendum, Laurel Park would be considered for one of the casino locations, but several other companies have also begun expressing an interest in operating a casino in Laurel's county.

The Maryland situation is complicated by a deal that Magna has with the former owners of Laurel Park. The deal gives the former owners a large ongoing stake in any profits that would result from casino gambling for 20 years. Those partners, according to several officials, have tried to get Magna to sell its stake in the casino revenues but have had no success.

"Nothing is going to happen here until after the referendum," said one of the Maryland racing officials. "The situation is too fluid."