07/15/2002 11:00PM

Muted reaction to Maryland deal


The reaction on Wall Street Tuesday to the announcement that Magna Entertainment had purchased majority shares in the Maryland Jockey Club's Pimlico Race Course and Laurel Park was muted. Magna's stock dropped 3 cents, or one-half of 1 percent, to $6.02, on volume of 54,100 shares, well below the company's average daily volume of 335,000 shares.

Around the racing industry, the reaction was much the same.

Speculation about the deal within the industry had circled for months, and the announcement was widely anticipated, taking some air out of the bubble. Racing officials contacted on Tuesday said they did not believe Magna's investment would lead to dramatic changes at the track or on the Preakness Stakes, the Maryland Jockey Club's breadwinner and one of the most valuable properties in the entire sport.

"There's no way they upset the apple cart," said Barry Schwartz, the chairman of the New York Racing Association, which is now a partner with Magna in Triple Crown Productions. "The Preakness is the only thing in Maryland that isn't broken. They paid a lot of money for it, and they're not going to mess with it. They're going to want to protect their investment."

Magna announced on Monday that it was paying $50.6 million for a 51 percent stake in Pimlico and a 58 percent stake in Laurel. Magna is also paying Joe De Francis and his sister, Karen De Francis, who inherited the Maryland Jockey Club from their father in 1989, $9.2 million each for the option to buy their shares of the track four years from now. Joe De Francis will remain chief executive of the two tracks under a separate management contract.

At the press conference to announce the deal, Jim McAlpine, Magna's chief executive officer, reiterated Magna's vision of expanding the distribution of Magna's racing product through television and off-track betting, including Internet wagering. But he declined to offer any specifics about plans for Laurel and Pimlico, although he did say the company had absolutely no plans to move the Preakness to any of its other tracks.

"Our feelings are that it should stay here forever," McAlpine said.

Karl Schmitt, the vice president for corporate communications at Churchill Downs, which is also a partner in Triple Crown Productions, said that Triple Crown Production's television and business contracts provided a long-term stabilizer to the Preakness, no matter who runs the tracks. A national broadcast agreement with NBC runs through 2005, as does an agreement with ESPN and ESPN2 for Triple Crown prep races. A national marketing deal with Visa also runs through 2005.

"There are two things here" that make the Preakness stable, Schmitt said. "First off, the primary value-drivers are already in place. That's the TV contracts, and the marketing partnership with Visa. The other thing is that we've had a tremendous relationship with the De Francis family over the years, and we see no reason that won't continue."

Some other racing officials, however, noted that Magna has a history of losing top officials, creating concerns about Joe De Francis's ability to remain in management. Magna has had four chief executives since being formed in 1999, and dozens of lower-level employees have gone through the Magna revolving door as well.

One racing official who spoke on the condition of anonymity wondered "what kind of marriage this will be between Magna and De Francis," citing Magna's majority equity position and backseat management position.

"I think that will be the most interesting thing to watch," the official said. "Magna is not in this kind of position at its other tracks."

Meanwhile, an analyst who has been critical of Magna in the past said on Tuesday that the company's latest acquisitions would have no bearing on his poor rating of the company's performance.

"I'm maintaining my rating," said Ryan Worst, an analyst with Dresdner Kleinwort Wasserstein. "It's a continuation of what they have been doing, so it really doesn't surprise anyone."

On Monday, the day the Maryland acquisition was announced, shares of Magna dropped 39 cents, or 6 percent. Volume that day was half of the company's average.

Worst said he believed that Magna had overspent for the shares in Pimlico and Laurel, an assertion he has made about other Magna acquisitions. Worst said he also believed that Magna would have to spend $8 million to $12 million for repair work at the tracks, which have been dogged by structural and aesthetic problems.

Worst said that Magna's investment could make sense if Maryland legislators legalized slot machines at the tracks - and if lawmakers agreed to cut the tracks in on a large share of the revenues. De Francis has avidly pushed for slots in the past, with no success so far, but he has been opposed by Gov. Parris Glendening, a two-term governor who leaves office in January.

On Monday, Maryland's Republican gubernatorial candidate, Robert Ehrlich Jr., said he supports slots, but the Democratic candidate, Kathleen Kennedy Townsend, has said she would veto any bill approving slots for racetracks.