11/12/2010 12:48PM

Stronach move comes as racing assets continue to falter


Frank Stronach has taken over as chief executive of MI Developments, the racing and real-estate company that holds a portfolio of racing assets that continues to struggle.

Stronach was installed in the position on Thursday following the immediate resignation of Dennis Mills, a former member of Canada’s parliament who had been chief executive at the company for two years. Mills will remain vice chairman of the company’s board, which Stronach will continue to chair. According to the company, the board of MI Developments appointed Stronach chief executive.

The management changes were announced amid ongoing losses for the racing assets held by MI Developments and several competing offers for the company or its assets, including one by Stronach. In addition to announcing the changes, MI Developments on Thursday released its third-quarter financial results, which included a $23.8 million loss on its racing and gambling properties on revenue of $48.4 million.

Earnings from the company’s real-estate operations were enough to overcome the loss on the racing and gambling side, giving the company an $8.1 million net profit for the quarter. That was down sharply from the company’s $35 million net profit in the third quarter of last year, before MI Developments took over the operations of the racing assets from a bankrupt subsidiary, Magna Entertainment Corp.

Before declaring bankruptcy in 2009, Magna Entertainment lost hundreds of millions of dollars. Stronach served as chief executive of the company on two occasions.

As a result of its bankruptcy reorganization, Magna Entertainment was dissolved and many of its racing assets were transferred to MI Developments in a swap that wiped out $400 million in Magna debt held by MI Developments. The assets include Gulfstream Park and its adjacent casino in South Florida, Santa Anita Park and Golden Gate Fields in California, Portland Meadows in Oregon, and a half-interest in Laurel Park and Pimlico Race Course in Maryland. Other racing-related assets include the account-wagering company XpressBet, the bet-processing company AmTote, and a 50 percent stake in the horse racing television broadcast HRTV.

The third-quarter results demonstrate that MI Developments is facing the same stubborn problems that plagued its predecessor. In a release, MI Developments cited a paucity of live racing days during the quarter, lower revenue at its tracks, and expenditures related to political activities – including an unsuccessful petition drive it funded to overturn the zoning approvals for a casino planned for a location 10 miles from Laurel – for the losses.

Officials for MI Developments did not return phone calls on Friday.

Before taking over the racing and gambling assets at the end of April this year, MI Developments derived the vast majority of its revenue from rents collected on properties operated by Magna Entertainment and by an auto-parts company, Magna International, that is chaired by Stronach. The company had consistently posted profits from those operations over the years.

But now that the former operations of Magna Entertainment’s properties are directly on MI Developments’s books, the company is beginning to feel the strain. In addition to the loss of revenue collected on the Magna rents, MI Developments is no longer earning interest on the loans that it provided to Magna Entertainment, putting a sizeable dent in its non-racing operations.

Revenue for Mi Developments’s real-estate business was $42.8 million in the quarter, according to the financial statements released Thursday, down 24.9 percent compared with revenue of $57 million in the third quarter of last year. Significantly, this year’s third-quarter results were boosted by the inclusion of a one-time, $18.7 million “impairment recovery” on the loans that MI Developments had provided to Magna, according to a release accompanying the financial statements.

For the first nine months of 2010, MI Developments has had net income of $64.4 million, down 23.7 percent compared to the first nine months of 2009. The company took control of Magna’s racing operations on April 30 of this year.

In early October, Stronach offered to buy all of the outstanding shares in the company for $13 a share, a proposal that would have cost Stronach at least $600 million at the company’s stock price at the time, which was $10.67 per share. The buyout offer, however, immediately sent the stock over $14 a share, and it is currently trading above $16. The gain in the stock price indicates that shareholders believe the offer undervalues the company.

The stock received an additional jolt earlier this week when Halsey Minor, an Internet entrepreneur, offered to buy the company’s racing assets held for a total price of as much as $320 million. Minor had sought to purchase some of the assets from Magna Entertainment when it was undergoing its bankruptcy reorganization, but the offers were never seriously considered.

Several large shareholders of MI Developments have complained that the racing assets have created a drag on the company’s earnings, and Minor’s offer sought to exploit those criticisms by providing a proposal to take the assets off of MI Developments’s hands.