Updated on 09/16/2011 7:55AM

Poor quarter puts end to Magna spending spree

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NEW YORK - Officials of Magna Entertainment said Thursday that the company will stop acquiring racetracks, delay and perhaps cancel a massive renovation to the Gulfstream Park grandstand, and look for ways to cut costs in the wake of second-quarter earnings that did not meet analysts' expectations.

The dramatic about-face at Magna - which has rapidly become the largest racetrack operator in the U.S. through an aggressive campaign of expensive acquisitions - comes after Magna posted net income of $1.1 million in the second quarter, or 1 cent a share, compared to net income of $2.2 million in the second-quarter last year. Analysts had estimated that the company would have net income of 3 cents a share.

"We need to slow investment and capital spending," said Jim McAlpine, Magna's chief executive officer, during a conference call with analysts Thursday to discuss the results. "We need to take a breather from our acquisition and expansion mode."

Magna has spent $350 million in the past three years to acquire 10 racetracks, including Santa Anita in Southern California and Gulfstream in south Florida. Magna has pending deals to buy stakes in four additional racetracks for another $216 million.

Magna's stock price has plummeted since the company announced a $69 million deal to buy majority stakes in Laurel Park and Pimlico Race Course on July 16. The stock hit a new 52-week low last week.

Magna's stock was especially volatile on Wednesday and Thursday. In heavy late trading on Wednesday, before the second-quarter results were announced, the stock rapidly climbed 65 cents to $5.55, but on Thursday, Magna's stock fell back to $5.05. In late June the stock was trading at $7.

The net income figure for the second quarter included revenues from the sale of a condominium in Beaver Creek, Colo., for $6.1 million, Magna officials said. Without the income from the sale, Magna had net income of just $45,000 in the quarter. That figure most closely represents Magna's income from its racing operations. Magna officials refused to identify the buyer of the property.

Analysts disappointed

The results largely disappointed analysts because Magna ran 16 additional days at Gulfstream Park in the quarter compared to last year, as well as three additional days at Santa Anita. Although Magna will not break down its profit and loss by track, those two properties are considered the company's most lucrative, and analysts expected the additional days to boost earnings.

Magna officials said that earnings were hurt by increased insurance and utility costs, as well as a purse overpayment of $600,000, which was written off as an expense of the quarter. McAlpine also said that Magna's earnings were hurt by "underperforming" tracks, although officials would not identify those tracks.

Oklahoma horsemen's officials said that the overpayment occurred during the Quarter Horse meet at Remington Park. Normally, purse overpayments are made up during the following meet. Magna officials said they wrote the overpayment off because they did not believe they could recapture the purse money.

Magna informed the Oklahoma Racing Commission earlier this year that it was slashing 26 live racing days from the Thoroughbred meet at Remington later this year.

Magna is also facing problems in Ohio. Purses have been slashed 7 percent across the board at Thistledown, according to Dan Theno, executive director of the Ohio Horsemen's Benevolent and Protective Association, because of an anticipated $400,000 purse overpayment.

Costs will be cut

McAlpine and Graham Orr, the company's chief financial officer, said that Magna plans to tighten costs considerably in the future while sharply limiting its capital expenditures. In an interview, Orr said the cost-cutting would include layoffs as Magna consolidates departments at its tracks.

The $100 million Gulfstream renovation would have entailed tearing down most of the existing facility and rebuilding it. Magna officials had said the renovation would have transformed the property into an "entertainment center" with a concert area, shopping mall, and adjoining hotel.

Magna officials said they had decided to postpone a decision on the renovation to focus on a project to build a training center in West Palm Beach. The training center is expected to have space for at least 800 horses this winter, Orr said. Magna hopes the additional space will alleviate a horse shortage that plagued the 2002 Gulfstream meet.

McAlpine said that the cost of the training center would be approximately $70 million, a large amount for a training facility. The cost of the project - which includes a 1 1/8-mile dirt track plus two turf courses - has raised questions about whether Magna intends to convert the property to a racetrack.

Orr said that it was a "possibility" that Magna would seek racing dates at the Palm Beach facility. But he denied that Magna would look to sell the Gulfstream property, which sits on valuable seaside real estate along Highway A1A in Hallandale. "That has never crossed our minds," Orr said.

Orr said Magna officials were beginning to plan for the next three years with the mandate of making the company's tracks more profitable. Magna's strategy of rapid acquisitions, he said, will take a backseat.

"We will be alert to opportunities that are out there during the period," said Orr. "It's not like we're going to dig a hole and climb in it."