Friday, February 27, 2009

Magna in Default on Maryland Loans

Magna Entertainment, the company that operates Frank Stronach's race track empire, announced late Friday that it is in default on its loans from PNC Bank to the Maryland Jockey Club, Pimlico and Laurel.  In addition, Magna also disclosed that it has notified Wells Fargo Bank and the Bank of Montreal that it is in default on their loans as well.

While, according to the Magna Entertainment press release, none of the affected lenders have as yet commenced legal action to secure their claims, the lenders have reserved their right to do so at any time.  This means that the choice of whether, and where, to enter bankruptcy may no longer be for Stronach to make. In the words of the old Tennessee Ernie Ford song, every day Magna is another day older and deeper in debt.  It can't be long now.

The ultimate parent company of the Stronach conglomerate, auto parts supplier Magna International, recently reported a loss of $148 million for 2008. Losses at the peak of Stronach's pyramid scheme will undoubtedly threaten the financial viability of all the other Magna entities, including Magna Entertainment and its principal creditor, MI Developments.

In the face of the deteriorating financial situation, Magna Entertainment has lost three of its Directors, via resignations, since the start of the year.  Given the vacancies on its Board and audit committee, the company is no longer in compliance with Toronto Stock Exchange listing requirements, and given the persistence of its stock at miniscule levels -- it closed at 36 cents a share today, equal to 1.8 cents per share prior to last year's reverse stock split -- it's also not in compliance with NASDAQ listing rules.  Expect to see MECA on the Pink Sheets, where penny stocks are offered, any day now.Today's press release, which certainly won't help the stock price, was issued at 6:30 pm, well after the markets closed. That may be a sign that we'll see a bankruptcy filing before the markets open on Monday.

Stronach, who's mismanaged Magna Entertainment to where it is today -- helped along by the wilful ignorance of his hand-picked Directors -- did take a pay cut in 2008.  He was paid a mere $10 million by parent company Magna International, compared to $40 million in salary and bonuses and another $27 million from the exercise of stock options in 2007.  Poor Frank, it'll be hard to maintain that lifestyle on a mere $10 million a year, especially while spending all that time facing angry creditors.

Saturday, February 21, 2009

Fleeing Magna's Sinking Ship?

Magna Entertainment just announced that Jerry Campbell has resigned as a member of the Board of Directors. I don't know the background, but it's safe to assume that he may just be trying to get out ahead of the bankruptcy.  Who needs all that tsuris?

In addition to Magna's other troubles, Campbell's resignation means that Magna Entertainment is no longer in compliance with the Toronto Stock Exchange rule that requires at least three "independent" directors on a company's audit committee. Good luck trying to find another "independent" businessperson who wants to sign on to this particular ship of fools.

Thursday, February 19, 2009

Magna Death Watch

Well, we all pretty much knew it was coming, but today's announcement that Magna Entertainment (the race track company) and MI Developments (the real estate company) are abandoning their much-ballyhooed reorganization plan makes it more likely than not that we'll see Frank Stronach in bankruptcy court next month.

Under the plan that had been announced last fall, MI Developments would have injected substantially more cash into Magna Entertainment, and ultimately Stronach would have taken over complete control of the racing empire. The collapse of the plan, in the wake of strong criticism -- and threats of lawsuits -- from MI Developments' minority shareholders, puts Magna Entertainment in an impossible cash position.

Without the reorganization plan, Magna Entertainment will now face accelerated repayment of a variety of loans, both to MI Developments and to outside parties such as the Bank of Montreal. The details are available in the Magna statement and in Ryan Conley's report today in the Blood-Horse online, but in broad terms, Magna Entertainment has to come up with some $275 million, at least, in March unless it can renegotiate its loans.  Further details of Magna's obligations are reported by the Baltimore Sun. Something's got to give, since MEC doesn't have the cash.

Halsey Minor: if you're out there, there might be some race tracks for sale, cheap.
Update (11:39 pm): Magna also announced on Thursday that the Toronto Stock Exchange has begun an expedited review of whether Magna Entertainment stock should continue to be listed on the exchange. Despite a 1-for-20 reverse stock split last year, MEC shares are once again trading under $1, or at the equivalent of 3 cents a share if the price is adjusted for effects of the stock split. At that price, MEC may not even be trading on the penny-stock "Pink Sheets" much longer.

Sunday, February 15, 2009

Dubai's Troubles and the Two-Year-Old Sales

Just when we thought the horse market couldn't get any worse, there's news that the economy of Dubai, whose ruler, Sheikh Mohammed, is also the world's most important thoroughbred buyer, has become the latest victim of the global economic crisis.  As the two-year-old sale season begins, there couldn't be worse news for prospective sellers.

The two-year-old sales start this coming Tuesday, with Ocala Breeders Sales Co.'s select sale, to be followed in short order by the rest of the select sales: Fasig-Tipton Calder on March 3rd, Barrett's in California on March 10th, OBS again on March 17-18, and Keeneland on April 6-7.

Already, the portents for the two-year-old market have been reflecting the gloomy economic climate.  The general consensus seems to be that prices will be off at least 30-40% from the peaks of recent years. As of Sunday morning, 22 of the 200 horses in the sale catalog had been scratched, most before they even took to the track for Frday's breeze show.  If the fall and winter breeding stock and mixed sales-- where prices dropped by 40-50% and more --  are any indication, there will be lots more scratches and lots of "reserve-not-attained" (RNA) results when the auction does get underway.

Most of the horses offered at the select two-year-old sales are being sold by "pinhookers," who purchase them as weanlings or yearlings, push them through a tough, unforgiving training regimen in Ocala over the winter, and then hope to hit a home run selling to "end users," meaning people who actually want to race the horses.  At the yearling sales last year, before the full enormity of the financial crisis had become apparent, prices were off only about 20% from earlier years, so if the two-year-old sales do decline by 40% or more, the pinhookers will face a major cash squeeze.  That, in turn, will put downward pressure on yearling prices later in 2009, further fueling a vicious cycle, at least from thoroughbred breeders' point of view. 

Now, just to add to pinhookers' and breeders' worries, come reports that the economy of the Persian Gulf emirate of Dubai is in serious free-fall.  The New York Times recently reported that Dubai's boom years appear to be over: construction projects have been halted; foreign workers -- who make up as much as 90% of Dubai's 1.4 million population -- are being laid off and forced to leave the country; and real estate prices are falling rapidly (a leading bank predicts an eventual drop of 60% in property prices). Shares on the Dubai stock exchange have fallen farther than those in the US. You might remember DP World, which not so long ago was bidding to buy most US seaports. Now, shares in DP World, which were initially sold to the public at $1.30 a share just last October, were trading this mor ning at 23 cents. That drop reduces the market value of DP World from about $5 billion to less than $1 billion.  And you thought your 401(k) had been hit hard!

The reason all this matters for horse racing is that the economy of Dubai is inextricably linked with the personal fortune of its ruling family, headed by Sheikh Mohammed.  To take a single example:  The Dubai-based firm Synergy Investments Ltd. bought the Fasig-Tipton auction house last year, in a deal negotiated by Sheikh Mohammed's bloodstock adviser John Ferguson. News reports at the time described the CEO of Synergy, one Abdalla al Habbai, as a "close associate of Sheikh Mohammed." And, nine months later, that's still just about all we know about Mr. al Habbai's company.  A Google search turns up -- nothing. No financial reports, no stock exchange listings, not even a press release about anything other than the Fasig-Tipton deal. I've done a lot of investigating of companies around the world and have never found one that left as few fingerprints as Synergy Investments.  As for Mr al Habbai, a Google search shows that he's variously listed as a Director of the Noor Islamic Bank, as Chief executive of the Dubai Engineer's Office or as a Director of International Humanitarian City, a duty-free transit point for aid shipments in the Middle East. We can only presume, given Dubai's lack of financial transparency, that it's Sheikh Mohammed's money that went to buy up F-T. 

The full extent of Dubai's collapse is hard to determine, because of stringent government secrecy rules; a new draft law would make it a crime to damage the country's reputation or economy -- presumably by telling the truth -- and subject the offender to a fine of more than $250,000. But it's clear that the boom times are over. In fact, Reuters reports today that the complex of investment firms ultimately controlled by Dubai's ruler, Sheikh Mohammed, is in the midst of a major restructuring. The Sheikh's Dubai Holding, which has financed most of the spectacular construction in the Emirate, is cutting back, and Reuters reports that all the government-controlled firms in Dubai need to repay some $15 billion in loans this year, nearly as much as all the rest of the Persian Gulf states put together. Just this week, the Times reported that one of the investment funds controlled by the Sheikh had been denying that it plans to sell the luxury men's clothing chain Barney's, for which they paid almost $1 billion just two years ago. In the financial world, when you have to deny rumors like that, it probably means they're true.

And lots of Dubai's overseas investments have performed about as well as Vineyard Haven, the colt that Sheikh Mohammed bought from Bobby Frankel and Joe Torre last fall for a reported $12 million and took to Dubai, where the colt just ran an unthreatening 4th in the UAE 2,000 Guineas.  Just as Sheikh Mohammed has often overpaid for thoroughbreds, so Dubai's state enterprises seem to have overpaid for many of their acquisitions. For example, the state-controlled Dubai World paid $5.1 billion for a 10% ownership stake in MGM Mirage; those shares have since lost 80% of their value. Dubai's stake in Deutsch Bank is down 70%. And its luxury hotel chains are suffering from the global cutback in high-end travel, as is Emirates Airlines, also owned by a state entity. (For the Sovereign Wealth Fnd Institute's useful attempt to explain the complex of linked companies that invest Dubai's, and the Maktoum's, wealth, click here.) 

And even the bond-rating firm Moody's Investors Services, which was so friendly to US issuers of mortgage-backed securities long after the housing bubble burst, has concluded that Dubai's liabilities are growing much faster than its ability to pay them off. In fact, the Maktoums may, Bloomberg News reports, have to turn to neighboring Abu Dhabi for a bailout. Abu Dhabi has oil (8% of the world's reserves), and Dubai does not.

If things are as bad financially in Dubai as they now appear, it seems inevitable that the fallout will affect US racing, starting with this year's sales. While the Dubai royal family has bought only occasionally at the OBS two-year-old sales, it has been a major presence at the top end of Fasig-Tipton's Calder sale.  Last year, John Ferguson, acting for Sheikh Mohammed, bought five horses there for an average of $900,000.  The year before, Ferguson bought eight for an average of just under $800,000.  And, memorably in 2006, he engaged in the epic auction battle that pushed the price of The Green Monkey to a world-record $16 million, luckily for the Sheikh, as it turned out, letting Demi O'Byrne and the Coolmore interests win the battle.

And for many years, the Dubai royal family has been the single most important buyer at the Keenland September yearling sale.  Last year, they bought at least $36 million worth of yearlings; in 2007, about $27 million and in 2006 a stunning $76 million.

If the Maktoums were to scale back their involvement significantly, the top end of the US auction market would suffer severely. And the first test of whether that cutback is coming may well be in two weeks at the Fasig-Tipton Calder sale.  If Sheikh Mohammed isn't buying at a Fasig-Tipton sale, one where he practically owns the auction company, then it's unlikely he'll be buying in force at any of this year's sales.

A lot of pinhookers may suddenly be very interested in the news coming out of Dubai.

Friday, February 13, 2009

Vegas Race Books and TrackNet Reach Agreement

The Las Vegas Review-Journal reports that TrackNet, the Churchill-Magna alliance, has reached an agreement with the Nevade Pari-Mutuel Association that will permit the Vegas race books to resume taking parimutuel pool bets on the Churchill and Magna tracks as early as today. The race books had been blacked out for 16 days, as TrackNet sought higher fees for its simulcast signals.

No details on how much the fees have been increased are available, but they've certainly been raised from the historically low levels that the tracks let Vegas get away with for years.  My guess, though, is that the new agreement will still pay CHurchill and Magna less -- a lot less -- than the 6-7% for purses and another 6-7% for the sending track that has been the goal of the Thoroughbred Horsemen's group.  Fes for the simulcast signal from major tracks in recent years have tended to be between 3% and 5%, which is then divided between the track and the purse account.

An interesting freature of the TrackNet-Vegas agreement is that it sets up a two-tier system, under which the race books will pay a higher rate for premium tracks -- Santa Anita, Churchill and Gulfstream -- and a lower rate for the rest of the tracks in the TrackNet group, including the Fair Grounds, Arlington, Golden Gate, Laurel, Pimlico, Lone Star and Oaklawn.  That makes some sort of economic sense (at least to someone like me, whose horses run mostly on the "premium" NYRA circuit), but I can see horsemen's groups at the second-tier tracks being less than overjoyed.  It remains to be seen if any of those groups will exercise their veto, granted by the federal Interstae Horse Racing Act, to block their signal.

While it's undoubtedly a good thing to have racing available on as many platforms as possible, including the Vegas race books, one wonders whether TrackNet pushed the negotiations as far as they might have.  TrackNet itself is a large online betting operator, and it certainly has a built-in conflict of interest between its desire to increase online (and race book) betting on the one hand and Churchil and Magna's presumed interests as race track operators on the other.

Just as the current economic situation makes it hard for organized labor to take militant action, so the economic crisis in racing makes it difficult for horsemen's groups to be too militant about raising their share of online betting revenue. For now, we're all just trying to survive.

Sunday, February 8, 2009

NYRA's Slots Debacle

Just when we thought Albany couldn't screw things up any more in New York racing, we've learned (thanks to Tom Precious's excellent reporting in the Blood-Horse) that the on-again, off-again deal for slot machines at Aqueduct is once more off again.

To be sure, the parties say that there are just a few little hitches before the contract between New York State and the designated casino operator, Delaware North, can be signed. And, after all, it's only been four months since New York Governor David Paterson anointed Delaware North as the operator, mainly on the strength of its promise of $370 million in up-front payments to the state.  So what are these little hitches? Well, first, the $370 million seems to have vanished. Or, as Delaware North preferred to phrase it, they need to "restructure the financing package" and find new lenders. Since, as Alan Mann points out, the original source of the money was the soon to be extinct Merrill Lynch, it's not exactly a shocker that the funds have evaporated.

Oh, and if by some miracle Delaware North could round up the $370 million, there's still the little matter of the company's asking for protection against the presumed ill effects on its business of the casino that's now in the works for Belmont. Since nobody could possiby figure out, in the current economic environment, what that effect will be, the protection issue alone is certainly enough to stall negotiations forever and allow Delaware North, if it's so inclined, to walk away.

We (NYRA and the horsemen) have now waited eight years since the state legislature first approved slot machines for Aqueduct.  Every other flat and harness track in the state that was authorized to have the machines already has them installed and operating.  We, and the state, which is losing up to $1 million a day as a result of the delay, are still waiting for the Aqueduct farce to play out. And it'll be at least another 14 months after a contract is signed before the first machine is actually online at the Big A.

In a rational world, none of this would make sense.  The state would solicit bids from companies that have the money to get the job done, contracts would be awarded, and the job would be done. Those of us who are now paying $100 a day or so in training fees for each horse we keep at New York tracks would be grateful for the extra money in the purse account, NYRA would have a bit more to help out with maintaining and improving the facilities and attracting new fans, and the state would be getting its million a day. But none of this is rational.  The folks in Albany have been on the take for so long that they don't know any other way of doing business, and the slots disaster is just what that kind of business as usual mentality leads to.

Just to be clear, "on the take" doesn't have to mean actually taking cash or kickbacks personally, though that certainly happens.  Much more frequent is the "pay to play" ethos, which means that, if you want a politician to even consider your proposal, you'd better be one of their campaign fund contributors.

To see just how pervasive the perceived need for sending money to Albany is in the racing world, look at the very useful list compiled by the estimable Ben Liebman and posted on his Albany Law School web site. Here's what he said about some of the largest contributors:

the State’s thoroughbred breeders donated over $80,000 to political candidates and political committees. Richard Fields, formerly of Excelsior Racing, donated $60,000. Delaware North contributed over $40,000, Saratoga Harness over $80,000, Jeff Gural’s [he's a harness track operator] interests over $90,000, and NYRA’s PAC over $85,000. Donald Trump – without any gaming interests in New York but with significant interests in New Jersey - gave over $165,000 in contributions.

In addition,going through the lists, one finds a number of thoroughbred owners and trainers, from the Phippses ($500 to Republican State Senator Bill Larkin and another $1,000 to the State Senate Republican Campaign Committee) to my very own New York Thoroughbred Horsemen's Association ($1,000 to State. Sen. Bill Stachowski and another $2,000 to the Senate Republicans). NYRA, to its credit, seems much more even-handed, with a lot of money from the NYRA PAC and individually from Charlie Hayward and Steve Duncker going to Democrats. Apparently, as we in the NYTHA have been told repeatedly by our lobbyist, you can't even get your issue considered in Albany unless you're part of this corrupt system. Perhaps it's time for all of us to opt out.

The right thing to do, now that slot machines are inevitable, is to let Delaware North back out, find an operator who is ready, willing and able to manage casinos at both Aqueduct and Belmont, and get on with the job. The chances of that happening in a reasonable time frame are, I fear, infinitesimal.