12/21/2010 5:50PM

Trading halted on MI Developments stock


Trading of shares of MI Developments was halted on the Toronto Stock Exchange on Tuesday after reports of a potential deal that would allow the company’s chairman, Frank Stronach, to swap his controlling stake in the company for its racing assets.

Toronto financial regulators ordered the halt at 12:48 p.m., approximately one hour after Reuters reported the possibility of the deal to swap Stronach’s special-voting shares for the assets. The report cited unidentified sources.

The share price had risen 4.4 percent prior to the halt order, to $19.50.

Earlier this year, when the stock was trading at $10.67, Stronach had offered to buy all of the outstanding shares in the company for $13 a share. Immediately following the offer, stock in the company jumped to more than $14 per share, and the share price has steadily risen since then. The rise in the share price indicated that investors believed that the first offer undervalued the company, and, as a result, the offer has never gained traction.

Several large institutional shareholders of MI Developments have been highly critical of the company’s involvement in the racing industry. The critics have included Greenlight Capital, whose founder, David Einhorn, has complained that the racing assets are a drag on the company’s earnings. The Reuters report said that the new deal would likely gain the support of the company’s shareholder critics by transferring control of the racing assets to a private party and removing them from the company’s books.

Prior to taking over the racing assets from its bankrupt subsidiary, Magna Entertainment Corp., in April of this year, MI Developments derived the majority of its revenues by collecting rents from properties owned by MEC and an auto-parts company, Magna International, that also is chaired by Stronach. The company, which had consistently posted annual profits prior to this year, also derived revenues from loans it had provided to Magna Entertainment. The loans were ultimately wiped out in bankruptcy.

Since taking over the assets, MI Developments has had little luck in squeezing out operating profits with the new properties. According to the company’s financial statements, MI Developments lost $23.8 million on its racing and gambling assets during the third quarter on revenue of $48.4 million. Magna, its predecessor, lost hundreds of millions of dollars on the properties prior to filing for bankruptcy in 2009.

If the deal reported by Reuters were approved by shareholders, Stronach would give up super-voting shares that allow him to hold approximately 60 percent of the voting rights while only holding less than 1 percent of the nominal value of the equity in the company. According to Reuters, the deal also would require the election of a new board at MI Developments.

Stronach is currently chief executive and chairman of MI Developments. He was appointed chief executive by the board in October following the release of third-quarter financial results and the resignation of former chief executive Dennis Mills.

MI Developments currently owns Santa Anita Park and Golden Gate Fields in California; Gulfstream Park and an adjacent casino in south Florida; and a 51 percent stake in Laurel Park and Pimlico Racecourse in Maryland (a deal to sell a 49 percent stake in the tracks to Penn National Gaming Inc. has closed but has not been approved by regulators). It also owns AmTote, a bet-processing company; the account-wagering platform XpressBet; and a half-interest in the television broadcasting company HorseRacingTV.