03/27/2009 12:00AM

Subsidiary to operate Magna tracks


MI Developments, the controlling shareholder of bankrupt racing operator Magna Entertainment Corp., plans to operate the assets it buys from Magna Entertainment through a wholly owned subsidiary until at least 2012, the company said Friday in a release accompanying documents detailing its 2008 financial performance.

The plans to segregate the racing properties into a separate subsidiary - tentatively called RaceCo - are the first detailed disclosures made by officials at MI Developments about the company's intentions for a bundle of racing properties that it has already agreed to purchase from Magna for a total consideration of $195 million, as well as any racetracks MI Developments might buy in addition to the bundle. Under the plan, MI Developments will operate the properties until Dec. 31, 2011, the company said, at which time it will sell the subsidiary or spin it off to shareholders if it is profitable, or, if the company continues to lose money, "cease racing and gaming operations . . . and either sell or develop all of RaceCo's remaining assets."

The proposal to shift the racing properties to the books of MI Developments, even over a 30-month period, will likely rankle several large minority shareholders of the company, including Greenlight Capital, which has agitated against MI Development's continuing involvement with Magna Entertainment's racing business for several years. MI Developments is Magna Entertainment's largest creditor, owed $372 million, and Magna Entertainment's financial performance last year dragged MI Development's earnings down $134.8 million in 2008, according to the financial documents released Friday morning.

In an effort to placate those critics, MI Developments on Friday said that it will not make any "further debt or equity investment in, or otherwise give financial assistance to RaceCo" while operating the racing properties, unless it gets the approval of a majority of votes of minority holders of the company's Class A shares. In addition, MI Developments said the company will "also agree not to enter into any transactions in the horse racing or gaming business except through RaceCo" without minority-shareholder approval.

A spokeswoman for Greenlight, Monica Everett, said on Friday the company would have no comment on the MI Development proposal.

Both MI Developments and Magna Entertainment are controlled by Frank Stronach, the founder and chairman of both companies. Stronach exercises his control over the companies through super-voting Class B shares. As a result, it is unlikely that minority shareholders of MI Developments will be able to block the company from taking on the Magna properties unless the bankruptcy court agrees with their objections, although the shareholders would be able to block any other investment in the racing business from that point forward.

Magna Entertainment, which has lost hundreds of millions of dollars since being founded by Stronach 10 years ago, filed for Chapter 11 bankruptcy on March 5.

The MI Developments bundle includes Gulfstream Park, Golden Gate Fields, Palm Meadows Training Center, Lone Star Park, AmTote International, XpressBet, and a real-estate development adjacent to Gulfstream. Of the total purchase consideration, $44 million is cash, $136 million is debt forgiveness, and $15 million is from an unspecified lease that MI Developments will take over.

The agreement with MI Developments has been described by Magna Entertainment as a stalking-horse bid. Under the rules for the bid, other entities may submit bids for any or all of the properties. According to officials advising Magna on the stalking-horse bid, the entities within the bundle will not be priced separately before bids are accepted.

The properties included in the MI Developments bundle cost Magna more than $700 million to buy, renovate, and construct.

MI Developments reiterated in the Friday announcement that it intended to "immediately commence seeking all required approvals" to develop Golden Gate Fields, a San Francisco-area property that is the only remaining major racetrack in Northern California. Dennis Mills, the chief executive of MI Developments, has said that gaining the approvals will likely take several years, and MI Developments would continue to operate the track while seeking the go-aheads.

Several high-profile racing properties owned by Magna Entertainment are not included in the bundle, including Santa Anita Park, Laurel Park, and Pimlico Racecourse. Magna Entertainment has asked the bankruptcy court to approve an auction process for those tracks, along with the auction process governing the stalking-horse bid. The court is expected to rule on the motions at an April 3 hearing.

Last week, Mills said that MI Developments is evaluating whether to bid on other properties owned by Magna that are not included in the MI Developments bundle. Mills reiterated that statement on Friday. If MI Developments succeeded in acquiring the tracks through both processes, Magna Entertainment would essentially have been transferred in total to MI Developments.

MI Developments closed at $6.12 on Friday, up 32 cents, or 5.5 percent.