Adieu Magna?

One of the fringe benefits of being a recovering (i.e., retired) lawyer is that you know how to read financial statements, but you only have to read the ones that interest you, and not, as in the old days when one was still working at a law firm, the incredibly boring ones of your clients or their takeover targets. So, when Frank Stronach's Magna Entertainment Corp. filed its quarterly financial report with the Securities and Exchange Commission last Friday, I decided it was time to put some of those old skills to use. For what can be more entertaining than deconstructing what was certain to be bad news? And if the report provided some ammunition for criticizing Stronach, so much the better; after all, his "vision" single-handedly destroyed the perfect winter race track that was the old Gulfstream.

And bad news it surely is. At least for Frank Stronach and for those who, quite frankly, are unlucky enough to still own Magna stock. (Full disclosure: I bought a little bit of Magna Entertainment Stock shortly after its initial public offering, and got out soon after with a modest profit.)

As has already been reported, Magna lost $67.7 million for the first half of 2008, including a $21.3 million loss in the second quarter, which ended June 30th. That brings the company's accumulated losses since 2005 to a total of $578 million. Just think, for that money Frank could have stayed out of the race track business and bought himself a few more nice horses. He might even have given Demi O'Byrne of Coolmore and John Ferguson of Darley/Godolphin/Shadwell a run for their money at the top of the yearling and two-year-old markets. Perhaps The Green Monkey would have run faster in Frank's snazzy black silks.

But on to the ever so revealing details

This is the only financial report I've seen that starts out with a paragraph saying that the company's ability to continue as a going concern is in serious doubt. In English, that means that they can't pay their bills on time, and if the creditors don't give them some leeway, the next stop is bankruptcy court.

Specifically, Magna owes its lenders $230 million that's due to be paid by June 30, 2009. And a lot of that is due very soon indeed. An unspecified portion of a $40 million revolving credit facility is due to be paid to the Bank of Montreal this Friday, August 15th; the loan was just extended from its original due date of July 31st. Up to $110 million is due to another Stronach company, Magna International, at the end of August; as is another $100 million related to the Gulfstream construction project, also due to a Magna-related company. Even if Stronach can con his long-suffering minority shareholders one more time and get those Magna-related loans extended, there's still the bank loan that's due on Friday. Will the bank really believe it should extend Frank's credit one more time? And there are signs that the shareholders in those companies that Magna Entertainment owes money to are getting restless as well.

Further embarrassing Stronach and Magna is the fact that the company had to do a reverse stock split -- one new share for every 20 old shares -- just to keep the stock price above the $1 a share level that's required for continued listing on the NASDAQ exchange. (Today's stock price was $7.71 for a new share -- or roughly 39 cents for an old share -- down about 85% over the past year.)

And, lest we forget, there are some fairly absurd assumptions hidden in the fine print of the Magna quarterly report. Just as an example, the company is carrying "racing licenses" on its books as assets worth some $109 million. But racing licenses are simply the permits that the state gives to tracks that are actually conducting racing, so those so-called assets would simply disappear if the company ceased racing (which it might or might not have to do if the company were in bankruptcy). Mre importantly, racing licenses would be worth zero to anyone buying a track for its real estate potential, and that's the most likely source of buyers. More smoke and mirrors, I'm sure, await a more detailed examination of Magna's SEC filing, but this gives you some idea of the mess that the company is in.

The last time we heard a plan from Stronach for keeping Magna Entertainment alive and in the racing business, was last September, when he announced that he intended to sell a bunch of properties in order to make the company completely debt-free by the end of 2008. The latest quarterly report admits the obvious: that ain't gonna happen. Of the various Magna properties that he expected to sell, only the defunct Great Lakes Downs in Michigan, sold to the Little River Band of Ottawa Indians for a fire-sale $4.5 million, has actually been disposed of. Still on the block, with no takers in sight, are Magna's land in Dixon, CA, once intended as the site of a new race track; and additional landholdings in upstate New York, Ocala, at Gulfstream and near Laurel in Maryland, as well as the Magna Racino in Frank's homeland of Austria. Also for sale are three race tracks: Portland Meadows in Oregon, Thistledown in Ohio and Remington Park in Oklahoma. And the newest quarterly filing adds to the for-sale list: Stronach is willing to sell interests in the hotel-retail-condo development and parking lot rising up in what used to be Gulfstream's beautiful paddock and back yard; and, most surprisingly, a majority interest in Santa Anita seems to be on the block. Assuming that anyone would be willing to partner with Stronach, that would leave Magna with control of only Gulfstream and the Maryland tracks, Laurel and Pimlico. A far cry from the empire contemplated just a few years ago.

Of course, getting all these asset sales done before Magna runs out of cash is pretty unlikely in the current real estate market. A much more likely scenario, given the increasing opposition to Stronach's restructuring plans among the minority shareholders in various Stronach companies, is that one or more creditors will push the company into bankruptcy.

And when that happens, the fate of the race tracks will be out of the hands of racing people. Sure, there will be racing industry bidders for the prime properties-- Churchill comes, inevitably, to mind -- but the duty of the bankruptcy court is to get as much as it can for the creditors, and most of the race tracks are probably worth more as real estate development locations than they are as functioning tracks. So, while we may be glad to see Stronach go, and not above just a little schadenfreude (dictionary: a malicious satisfaction derived from the misfortunes of others), Magna's over-reaching and subsequent downfall could take a good chunk of America's race tracks down with it.

In a conference call discussing the quarterly results, Stronach said "I think I'm reasonably intelligent." Well, reasonable people may differ. As another reasonably intelligent person said, "you gotta know when to hold 'em and when to fold 'em." Frank, it's time to fold, while we perhaps have time to rescue some of those tracks before they become tracts. Make a deal with someone who still cares about racing, and who has the financial resources to protect the race tracks as they are, or, even better, as they were before you took over.