Saturday, October 18, 2008

Stronach - Waist Deep in the Big Muddy

Back in 1967, folk singer Pete Seeger wrote “Waist Deep in the Big Muddy,” a trenchant commentary on the stupidity of pressing ahead – in that case, with the Vietnam War – when everyone knew the cause was hopeless. (Here’s a link to the song’s debut on national television in 1968, after CBS relented in its efforts to keep it off the air.)

It seems to me that the song is once again appropriate, and not only to the current occupant of the White House.  Frank Stronach seems intent on leading Magna Entertainment, and with it the shareholders in other Magna companies, deeper and deeper into the swamp that he has created.  Only now people are beginning to speak out and call his bluff.  As Lyndon Johnson discovered in 1968, once that happens, the question is not if the end is coming, but when.

As I noted some time ago, Magna Entertainment, which owns Gulfstream, Santa Anita, Laurel and Pimlico, Lone Star, Golden Gate Fields, Remington Park and other racing properties, is insolvent, unable to meet its liabilities as they come due.  Its stock has lost 95% of its value over the past two years, and it has been repeatedly forced to negotiate month-by-month extensions of its working-capital loans with the Bank of Montreal and, more importantly, MI Developments Inc., a Stronach-controlled company that has been keeping Magna Entertainment on life support with hundreds of millions in intra-company loans. MI Developments owns a majority stake in Magna Entertainment, and, even though Stronach himself owns only 2% of MI Developments, he has thus far been able to exercise effective control. That situation is about to change, though.

Stronach, of course, has been doing everything he can to keep it from changing. For example, Magna Entertainment reported to the US Securities and Exchange Commission this past Wednesday that it had once more renegotiated the loans.  This time, the Bank of Montreal gave Frank until November 17th to repay its $40 million. Magna Entertainment had to pony up an extra $400,000 to secure this extension, in addition to the junk-bond interest rate that it’s paying on the loan. In addition, MI Developments not only extended the due date on its $110 million loan to Magna Entertainment, to December 1st, but also increased the credit line from $10 million to $125 million. And MI Developments also extended the repayment date on a separate $100 million loan for the Gulfstream Park redevelopment, also to December 1st.  Magna Entertainment was charged $2.25 million as a fee for those extensions.  Only God, and Frank, know where that money came from.

Trouble is, as Ray Paulick has prominently pointed out there are now others involved – the wealthy outsider Halsey Minor, who has offered to buy the MI Developments debt, and MI minority shareholder Richard Fried, who has gone public with his disgust at Stronach’s use of MI Developments to prop up Magna Entertainment. Fried’s firm has an 8.5% stake in MI Developments and, not surprisingly, doesn’t want to see its investment sink into Frank’s swamp. In a letter to the Board of MI Developments Board Fried says that Magna Entertainment “has been, is and will remain a financial sinkhole.” The letter threatens legal action if the MI Developments Board of Directors – which, like the boards of all Magna companies, consists primarily of Frank’s friends and flunkies – doesn’t stop paying for Magna Entertainment’s ongoing losses.

Halsey Minor, the CNet founder who has also been negotiating with John Brunetti to buy Hialeah, has apparently attempted to buy some of the Magna race tracks as well, notably Pimlico and Laurel.  When he got no response to those offers, he went public with a bid to buy up the various debts that Magna Entertainment owes to MI Developments. Minor has offered to buy those loans at par, thus getting the outside shareholders in MI Developments off the hook and at the same time putting himself in a position to foreclose on some of the race tracks.  Shrewd move, and Minor has some heavy hitters lined up to do the hard work on his bid – the Australian-based Macquarie Capital to handle the finances, and the large US law firm Latham & Watkins to do the legal work. Using advisors of that caliber means he’s serious.

Stronach is trying to hang on.  He’s countered the outside pressure from Minor, as well as the hedge funds and venture-capital firms that own a stake in MI Developments, with a plan to have that company turn Magna Entertainment into a wholly-owned subsidiary (right now, MI Developments owns 54% of the stock in Magna Entertainment, but has 96% of the voting power, because different classes of stock carry different votes). But now that the MI Developments shareholders have begun to threaten legal action, that sleight of hand is probably doomed. Frank may be waist deep in the big muddy, but it looks like the rest of the platoon is heading back to shore.  Between the well-financed bid by Halsey Minor and the increasingly short temper of the minority shareholders, it looks like the end of Frank’s dream could be only weeks or months away.

No comments: