Building Blocks - by Dan Liebman

It was a casual introduction, nearly 25 years ago now, at the Fasig-Tipton Kentucky November breeding stock sale. Remember his name, the man said, because you are going to hear a lot from him. We’ve all heard that before; only this time it was true—we have heard a lot from Frank Stronach in the ensuing years.

Some people, such as Stronach, are builders. He built Magna International into a leading global supplier of auto parts. Then, in the mid-1980s, fueled by a passion for the horse and the sport of horse racing, he began building a breeding and racing operation that became Adena Springs and Stronach Stables. The past five years in a row, Adena Springs has been named the Eclipse Award-winning breeder. Stronach has picked up four statues earned as leading owner as well.

With so much success breeding and racing horses, only a builder such as Stronach could sell the land upon which his Thoroughbreds were foaled and raised in Kentucky (he also owns farms in Canada and Florida) and construct a new farm from the ground up. But he did just that, selling one farm near Versailles and building a new Adena Springs near Paris.

Stronach had dreams of more than just breeding and racing horses. He envisioned turning racetracks into entertainment centers, where customers would not only wager on the races, but also see a movie, shop at a mall, and eat a nice meal. So he began buying racetracks.

In less than a year, starting in December 1998, Stronach-controlled Magna Entertainment Corp. (MEC) bought five tracks, including Santa Anita Park and Gulfstream Park, for more than $330 million. He was not just buying racetracks but the valuable real estate upon which they sit.

Other tracks would be purchased in the ensuing years, as would a tote company and the land upon which was built the Palm Meadows training facility in Florida.

But something else was being built along the way—a huge pile of debt. That debt led MEC to what seemed inevitable for many months: a bankruptcy filing. On March 5, MEC filed for Chapter 11 protection, the day a huge note was coming due. Losses have totaled roughly $300 million over the past three years.

The largest secured creditor of MEC is MI Developments (MID), the real estate subsidiary of Magna International that has loans to MEC totaling $372 million. MID, controlled by Stronach, will continue to loan funds to MEC to continue operations and will also purchase Gulfstream, Lone Star Park, and Golden Gate.

Other tracks, such as Santa Anita, Laurel and Pimilco, Remington Park, and Thistledown, will continue to operate as debts are paid and assets are sold. Each of those tracks may be sold.

MEC’s problems are exacerbated by numerous factors, among them the global economic crisis. Hard hit is the automobile industry, which has dramatically affected Magna International. The company reported fourth-quarter losses of $148 million.

This is not a good time to be selling a racetrack, or most other properties for that matter. Real estate values are considerably lower than when MEC purchased, within a few months of each other in 2002, a majority interest in the Maryland Jockey Club tracks of Pimlico and Laurel for $117.5 million and Lone Star Park for $100 million.

It is doubtful any track purchased by MEC can be sold for a price close to what the company originally purchased it for, because in addition to depressed real estate prices, wagering continues to decline nationally, falling 6.76% in January and February after dropping 20.3% in December.

Shareholders of MID are obviously not pleased with losses associated with helping finance the dreams and passions of company founder Frank Stronach. But dreams and passions are important, and we cannot fault Stronach for his strong belief and faith in our industry.

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