02/01/2011 10:57AM

MID shareholders agree to transfer racetracks to Stronach


Frank Stronach has moved one step closer to taking control of the troubled racing assets his publicly traded companies have acquired and failed to turn around over the past 13 years.

Groups representing the majority shareholders of the company that owns the assets, MI Developments, have agreed to vote in favor of a proposal that would require Stronach to give up control of the company in exchange for the racing and gambling properties, according to an announcement from MI Developments released late on Monday night. Stronach currently controls 57 percent of the voting stock of MI Developments through an unusual dual-class share structure that would be abandoned as a result of the deal.

If approved by shareholders at a meeting in March and then by an Ontario Supreme Court Justice, the deal would seem to satisfy both Stronach and the company’s largest shareholder groups, even if the financials of the deal tilt heavily in favor of Stronach, whose supervoting shares represent only 1 percent of the total equity in the company. Stronach has sought to exert more control over the assets, while shareholders of MI Developments have long wanted to get the company out of the racing business.

Under the plan, Stronach would take possession of Santa Anita Park and Golden Gate Fields in California; Gulfstream Park, Gulfstream’s casino, and the Palm Meadows training center in Florida; MID’s majority stake in Laurel Park and Pimlico in Maryland; Portland Meadows in Oregon; and the account-wagering operation XpressBet, the bet-processing company AmTote, and MID’s half-stake in HorseRacing TV. In exchange, Stronach would forfeit the supervoting shares and advance $20 million to MID.

According to a calculation performed by a company hired by MID to assess the deal, the assets that Stronach will receive are worth $585 million to $730 million, while the nominal value of Stronach’s shares in the company are worth approximately $10 million, at the share’s price on Tuesday, making the total monetary cost to Stronach around $30 million.

But despite that disparity, many shareholders of MI Developments have been eager to see the assets wiped off the company’s balance sheet, in large part because the assets have never consistently generated profits, and because there don’t appear to be any obvious strategies to turn them around. MI Developments took possession of the assets last April, after the company’s subsidiary, Magna Entertainment – which Stronach also controlled – was dissolved in bankruptcy court.

MI Developments derives the brunt of its revenues from lease payments made by manufacturing properties owned by Magna International, an auto-parts company Stronach founded. The company has consistently generated tens of millions of dollars in annual profits from the predictable revenue streams provided by the leases.

But the takeover of the racing and gambling assets has dragged those earnings down considerably in only nine months. For example, in the third quarter of last year, the racing assets lost $23.8 million, on revenue of just $48.4 million, dragging net profit for the quarter down to $8.1 million. Magna Entertainment lost hundreds of millions of dollars with the same assets prior to filing for bankruptcy in 2009.

As a result, the move could pose considerable financial risk to Stronach’s personal fortune, which is estimated in the hundreds of millions of dollars. If the deal goes through, Stronach, who is 78, will be on the line for any losses, and will have very few options to shore up the properties without reaching into his own pocket, given the credit histories associated with the assets and a clause in the deal that prohibits MI Developments from offering any support to racing businesses.