Andrew Beyer: Magna's Chapter 11 Filing Does a Number on the Horse Racing Industry

By Andrew Beyer
Saturday, March 7, 2009

HALLANDALE BEACH, Fla. The bankruptcy of the Magna Entertainment Corp. -- owner of some of America's most famous racetracks -- was not another case of a company ruined by executive greed. On the contrary.

Magna's all-powerful chairman, Frank Stronach, loves horses and racing. He has invested countless millions of his own dollars in his personal breeding and racing operation, and his passion for the game led him to buy racetracks from Gulfstream Park to Santa Anita. He wasn't motivated by the desire to install slot machines or any other hidden agenda. He genuinely thought he could make horse racing more enjoyable and more popular. Yet the man who loves racing has plunged the sport into a crisis.

It is a crisis because of an economic fact that has always been the equivalent of a ticking time bomb for U.S. horse racing. Many of the country's most important tracks were built decades ago and occupy large tracts of prime urban real estate. Any developer could find better uses for them than operating a four- or five-month race meeting. Such tracks have continued to exist because of their owners' commitment to the sport.

But after Magna filed for Chapter 11 bankruptcy protection on Thursday, some of the most famous entities in the sport will be put up for sale. Suddenly, it is possible to envision racing without the Preakness at Pimlico, without Gulfstream Park or Santa Anita.

Magna tried to put the best possible spin on the bankruptcy filing, saying in a statement, "In today's challenging economic environment, many companies are using Chapter 11 to reduce debt and position themselves for future growth." But the idea of Magna positioning itself for future growth is a pipe dream. In other cases of Chapter 11, creditors have an interest in helping a company reconstitute itself. Should General Motors file for bankruptcy protection, bondholders' best hope is for the auto company to survive and become profitable again.

Creditors have no interest in reviving a company that brought on its own demise with a series of disastrous financial moves. It bought Gulfstream Park for $90 million, then demolished it and spent $240 million to build a new facility that most fans regard as inferior to the old one. Because Gulfstream needed stabling for more horses, Stronach decided to build the Taj Mahal of stable areas, Palm Meadows, at a cost in the vicinity of $100 million -- an investment that returns no revenue.

Magna bought Laurel and Pimlico for an inflated price of $171.5 million -- and yet ceded a larger portion of future slot machine revenues to the seller. With its debts mounting, Magna stayed afloat by borrowing money from another Stronach company, MI Developments, infuriating shareholders who didn't want their money squandered on unprofitable racetrack projects. Farallon Capital Management of San Francisco was one of those investors, and it protested that MI Development was "pursuing a value-destroying investment [to please] Frank Stronach." It described Magna Entertainment as a "financial sinkhole."

Under pressure from such shareholders, MI Developments turned off the spigot of money, and without regular infusions of outside cash Magna couldn't survive. In the deal that was announced Thursday and must be approved by a bankruptcy court, MI Developments will give Magna cash to keep its day-to-day operations going and will buy many of the Magna properties -- notably Gulfstream and Golden Gate Fields in Northern California. Other tracks -- Santa Anita, Laurel and Pimlico -- remain part of Magna, for the time being, at least. When the Baltimore Sun asked Stronach if these were for sale, the chairman replied, "If the price is right."

There are few potential buyers who would want these properties as racetracks. Churchill Downs Inc. is the other major owner of U.S. tracks, but it now appears more interested in online wagering and slot machines than live racing. Perhaps it would want Gulfstream or Santa Anita because it needs good betting products to offer in the winter months.

Technology entrepreneur Halsey Minor has displayed some interest in the racing business; last fall, he made an offer to buy some of MI Developments' loans to Magna but was rebuffed. But there aren't going to be many bidders who want to operate even the prime racetracks, and it is probable that nobody will want the lesser tracks in Magna's portfolio, such as Thistledown in Ohio.

The fate of Maryland racing is especially uncertain. Because of the Preakness's importance and profitability, someone will want to own Pimlico, and the state of Maryland could always be a buyer of last resort. But Laurel Park is probably worth more for real estate than for horse racing, particularly because its decade-long effort to obtain slot machines has failed. A year-round racing circuit in Maryland will cease to exist.

It was only seven years ago that Stronach promised to build a whole new Pimlico and "restore it to a world-class facility." He talked about making the Baltimore track the center of a larger entertainment complex. He talked about building a technical training center for inner-city youth. One of his chief lieutenants declared, "We intend to reinvent this business."

Like most of Stronach's visions, none of these things came to pass. Magna didn't reinvent the business, but it is about to reshape the racing industry in ways that no one could have imagined.

© 2009 The Washington Post Company