Magna: the Gory Details

As I noted last night, Frank Stronach's Magna Entertainment Corp. has posted another large quarterly loss.  For the quarter that ended on September 30th, Magna lost $48.4 million, bringing its accumulated losses over the last decade to a staggering $626 million total (over $300 million of those losses incurred just in the past three years).

Now that I've had a few hours to analyze the latest quarterly report, it's more apparent than ever that this is an enterprise on serious life support.  The distressing outlook for Magna that I discussed when their mid-year report came out in August has, if anything, become even worse.

In a sign of increasing desperation, Magna announced that it had hired the investment banking firm Miller, Buckfire & Co. to advise on restructuring, sales of assets and possible joint venture options.  Miller, Buckfire isn't your ordinary investment banker, doing whatever kind of deals it can put together.  No, these guys specialize in salvaging failing companies; their motto is "creative solutions for complex problems," and they've won something called the Turnaround Management Association's Transaction of the Year Award twice for their work with other distressed companies. Hiring this particular advisory firm is definitely a sign that even Magna's own management recognizes they're in dire straits.

Frank Stronach's comments on the quarterly results show at least some awareness that all is not well:

Although MEC has a strong asset base, we remain burdened with far too much debt and interest expense. Our previously announced debt elimination plan has been negatively affected by the weak real estate and credit markets, which have impacted our ability to sell non-core assets. As a result, we are evaluating MEC's core operations with a view to possibly selling or joint venturing one or more of MEC's core racetracks in order to strengthen MEC's balance sheet and liquidity position.

That's putting it mildly.  Magna needs to raise cash. Now. And it's trying to do that in the face of the worst US real estate and equities market in decades.  It'll need all of Miller, Buckfire's magic to turn this around.

The "core assets" that Stronach referred to are Santa Anita, Gulfstream, Laurel and Pimlico. When he starts talking about selling these tracks -- something that, in the face of lucrative offers, he has resisted up to now -- we can guess that even Frank is seeing the handwriting on the wall. He may, however, be seeing it too late; it's unlikely that, in today's depressed real estate and thoroughbred racing markets, anyone would offer today the same amount that they might have a couple of years ago, whether the prospective buyer intends to keep operating the properties as race tracks or "develop" them into condos and shopping malls.

Here are some of the highlights, and lowlights, of the latest quarterly report.

• While overall revenue remained flat, at $81.5 million for the quarter, this masked some differences arising from specific operations.  Revenue was down in Maryland (Laurel and Pimlico) and at Lone Star Park, but up at Gulfstream (from slot machines, not live racing) and Golden Gate. But the latter two increases resulted from one-time events, so the increase doesn't really represent a long-term improvement. At Golden Gate, there were 10 more racing days than last year, so the total improved, even though the daily average fell.  And at Gulfstream, there were more slot machines than last year, as well as simulcasting that wasn't available in 2007.
• Magna spent $2.4 million during the quarter promoting a yes vote on the slots referendum that was approved by Maryland voters on Tuesday. Magna will be applying for a racino license for Laurel, although the Baltimore casino will apprently be built downtown, and not at Pimlico, and so Magna wouldn't get as great a benefit as would be the case if the slot machines were part of a Pimlico racino.
• Magna's balance sheet shows that its available cash as of September 30 was only $21 million, compared with $34 million at the end of last year. That's very low for a company of Magna's size.  In addition, Magna continued to carry "racing licenses" on its books at a value of $109 million, even as the value of those licenses continues to decline.
• Although Magna has reduced its accounts payable from $65 million at the end of 2007 to $41 million at September 30 (I can hear the grateful sighs of various suppliers from here), overall indebtedness continues to rise. Total liabilities as of September 30 were $420 million, up from $390 million nine months ago.  The lion's share of that debt is owed to Magna's parent company, MI Developments, another member of Stronach's corporate empire.

As Stronach has admitted, Magna's much-publicized "debt elimination plan," announced just over a year ago, has failed.  No significant assets were sold in the third quarter of 2008, and earlier this week, the prospective buyers of Magna's 500 acres of land near Ocala FL backed out of their deal to take the land off Magna's hands for $16.5 million. In the current real estate market, it's hard to imagine that Magna's assets can be sold for anything approaching what Stronach paid for them.

MI Developments has continued to sink money into Magna Entertainment.  But, as Ray Paulick has pointed out, its minority shareholders are becoming increasingly restive.  The MI Developments board of directors has ignored an offer from internet entrepreneur Halsey Minor to purchase the Magna Entertainment debt -- which would put Minor in a position effectively to foreclose on Magna Entertainment and realize his dream of becoming a race track operator.  I don't claim to be an expert on the corporate law of Ontario, where MI Developments is headquartered, but it's hard to imagine that the board's turning down an offer to buy up Magna Entertainment's junk-quality debt for its full face value could possibly be seen as acting in the best interests of all shareholders, as opposed to the interests, best or otherwise, of Frank Stronach.

Magna Entertainment's loan obligations are once again coming due -- $40 million to the Bank of Montreal on November 17 and nearly $200 million to MI Developments on December 1.  These loans have been extended month-by-month during the past quarter, but if either the bank or the thus-far supine directors of MI Developments ever decide to pull the plug, the next stop is bankruptcy.

These race tracks are too important to be in the hands of a bankruptcy court -- or of someone like Frank Stronach, who has already proven his inability either to turn a profit or to provide a decent experience for the racing fan.  It's time, in fact it's long past time, for a change.