01/26/2012 12:27PM

Stronach plan presents $10 question for investors

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It may soon be possible to buy into a 20-horse racing stable for the price of a pizza.

That’s the plan envisioned by Frank Stronach, the owner and breeder who last year took possession of a half-dozen racetracks previously owned by a publicly traded company he controlled. In registration statements with the Securities and Exchange Commission filed late in December, Stronach outlined a plan to offer shares in six racehorse-ownership companies for $10 each, lowering the barrier to a level never before seen in the U.S.

Like the man who proposed it, the plan is quirky and ambitious. Each of the six racing companies – which are all named after horses Stronach has owned – have taken possession of 20 Stronach-owned 2-year-olds, which will be raced “until” November 2013, when the horses are late in their 3-year-old seasons. At that time, the six racing companies will “liquidate our assets,” according to the documents filed with the SEC, with the proceeds distributed to the shareholders.

For racing fans who have always dreamed of owning a racehorse, the opportunity to buy into an entire stable at such a low cost of entry may be attractive. While many racing partnerships offer the chance to buy into horses at small fractions of the expense, the Stronach companies are promising to stake new ground in the market by not only lowering the cost but also providing a means for investors to buy and sell stakes during the course of the companies’ operation.

“On the surface, I think this is a great opportunity to get people involved,” said Dan Metzger, the executive director of the Thoroughbred Owners and Breeders Association, which has several programs to encourage racehorse ownership. “Whether someone’s investing $200 or $200,000, it can get people talking up their participation in racing, and this is an opportunity to get people involved in racing who might be intimidated by lack of knowledge or cost of entry.”

Michael Pilmer, an official with Stronach’s private racetrack company, declined to answer questions on how the racehorse companies will operate, citing SEC restrictions on public comment during the commission’s review of a possible securities offering. 

The filings with the SEC state that each racing company will offer 405,000 shares to the public, with 45,000 additional shares being reserved for a company controlled by Stronach that will manage the operations of all six companies. If all of the shares in one of the companies are not completely sold, the company will not operate, though it’s also possible that Stronach would buy up any outstanding shares.

“He’ll buy whatever doesn’t get bought by someone else,” said an official who has worked closely with Stronach but did not want to speak on the record because of ongoing business relationships.

Like all prospectuses dealing with securities offerings, the filings for the companies delineate a number of risks for potential investors, including a statement that calls racehorse investment “a speculative activity” in which the “most frequent financial outcome . . . is the partial or total loss of invested capital.”

While it’s possible for a horse owned by a partnership to turn a profit, it’s also rare, and most racing partnerships are explicit in telling potential investors that their investments will almost certainly decline precipitously in value, not just to prepare the investor for the most likely scenario but also as a shield against litigation.

“We tell them that when they write that check, they can kiss it goodbye,” said Barry Irwin, the owner of Team Valor International, a racing partnership that campaigns 2011 Kentucky Derby winner Animal Kingdom.

Each of the prospectuses for the six racing companies includes a brief description of the horses that the company will own, including each horse’s purchase price at auction and its bloodlines. The rosters of the horses for each company appear to have been put together so that, in each case, the total purchase price of the 20 horses equals approximately $1.2 million.

Because the horses all came from Stronach’s extensive holdings, buyers will have to trust that Stronach deeded horses to the companies that represent promising runners, and not the horses that were deemed to have little talent after they were purchased as yearlings.

If the offerings are successful, Stronach will be repaid for the horses he provided to the companies with the proceeds from the stock sales. In addition, a company Stronach controls will receive a quarter of the proceeds to manage the horses through 2013.

According to the filings, the companies will “favor races” at Gulfstream Park in Florida and Santa Anita Park in Southern California, two racetracks that Stronach owns.

“I think his motivation, and this is based on conversations with him, is not necessarily to make a profit, it’s to get more horses at his tracks, and get more people participating in horse ownership at those tracks,” Irwin said.

The concept for the companies appears to borrow from racing clubs that have been operating in Japan for more than three decades. Those partnerships, which are usually formed by the breeders of the horses, have very low costs of entry and are overseen by the Japan Racing Association, the quasi-government agency that wields enormous influence over the sport.

The Stronach companies will be overseen by the SEC, which has strict and complex regulations designed to protect investors; they are so complex, in fact, that the prospectuses for the companies state that the offering and the paperwork that accompanies it is expected to cost each of the companies $1.15 million, for a total upfront expense of $6.9 million, or more than one-quarter of the $24.3 million expected to be raised.

But far more than the cost, the protections afforded investors by the SEC could create problems for the companies, officials said, because of the ease with which investors file litigation against companies with stock that loses its value. Most of those protections pertain to whether the issuer of the securities has properly informed investors of the risk involved with the investment or misrepresented the ability of the company to provide returns, and because the stocks in the companies are almost certain to decline, the companies will have to tread carefully.

“By doing this publicly, they’re opening themselves up to a tremendous amount of scrutiny,” Irwin said.