Bankruptcy judge approves Magna plan

Disregarding the objections of shareholders of both companies, a Delaware bankruptcy judge on Monday approved a plan that will allow Magna Entertainment to transfer the vast majority of its racing assets to its parent company and largest creditor, MI Developments.

The plan, which was supported by a committee of Magna's unsecured creditors, will wipe out Magna's $400 million debt to MI Developments in exchange for the titles to most of Magna's racetracks and related companies, including Santa Anita Park and Gulfstream Park. Under the plan, Magna's unsecured creditors will receive at least $89 million in cash, and they have agreed to drop a lawsuit alleging that MI Developments loaned Magna hundreds of millions of dollars even though the company's officers knew that Magna would file for bankruptcy.

Shareholders of Magna and MI Developments had filed objections to the plan, claiming, in part, that Magna had failed to conduct good-faith efforts to sell the assets as a way to pay off creditors and shareholders. Although attorneys for the shareholders did not return phone calls Tuesday, a racing official with claims in the bankruptcy case said that the shareholders of Magna who had objected to the plan were expected to file an appeal of the judge's approval.

Such appeals are rarely successful in bankruptcy cases, particularly when the company's top secured creditor - in this case, MI Developments - and its unsecured creditors supported the reorganization plan.

Magna Entertainment will cease to exist if the plan is approved, and its shares will be worthless (trading in its shares was halted prior to the company filing for bankruptcy last March). Both Magna Entertainment and MI Developments are controlled by Frank Stronach, who built Magna Entertainment into a racing empire largely with money from a publicly traded auto-parts company he founded and with the loans provided by MI Developments.

In addition to Santa Anita and Gulfstream, MI Developments will take possession of Golden Gate Fields in Northern California, Palm Meadows Training Center in Florida, Laurel Park and Pimlico Race Course in Maryland, the account-wagering company XpressBet, and the bet-processing company AmTote.

While Magna Entertainment was able to forestall bankruptcy by tapping MI Developments for money to meet its cash-flow needs as it posted hundreds of millions of dollars in losses over the past five years, MI Developments has said that it will adopt limitations on the degree of aid it can give to the racing properties, at a time when the entire racing industry is under enormous financial pressure and the commercial real-estate market is in the doldrums. MI Developments, which derives the vast majority of its revenue from leases on properties used by Magna International, has yet to announce those limitations.

Dennis Mills, the vice chairman of MI Developments who is a former vice chairman of Magna Entertainment, did not return phone calls Tuesday. In a statement released late Monday, Mills said that MI Developments will implement "individual plans for each asset to improve and maximize their economic values."

Magna's unsecured creditors, which included banks, were owed approximately $220 million, so the $89 million payment will give them a return of approximately 40 cents on the dollar. Members of the creditors committee have said that they accepted the terms of the asset-transfer plan because they did not believe that Magna could have raised more than $90 million to pay off unsecured debt through a dispersal of its assets.