Wednesday, November 26, 2008

Magna's Latest Scam

Frank Stronach may have thought that he'd avoid too much press comment by putting out a press release on his latest chimerical reorganization plan the day before Thanksgiving, but, unfortunately for him, the media and the markets were still wide awake.

The plan, in the unlikely event it's actually completed, would leave Stronach firmly in control of the race track company Magna Entertainment, and would take another Stronach entity, MI Developments, and its unhappy minority shareholders, out of the business of sinking ever more money into Frank's flawed vision. But it's a long way from putting out a press release to realizing the plan in practice.

Even though the press release only appeared online at 11:26 this morning, it's already been well reported by, among other, Ray Paulick, the New York Times,the Thoroughbred Times and the Toronto Globe and Mail.  Generally, the story has been presented as a way for the minority shareholders in MI Developments, who have been mightily aggrieved as that company continued to throw good money after bad in Magna Entertainment, to get out and limit their exposure to the race track business.  The stock market reacted very positively, with Magna Entertainment shares up over 40% for the day and MI Developments gaining almost 20% as well.

But in fact, when one starts to look more closely at the plan that Magna announced, it becomes clear that the chances of the reorganization plan's actually happening are virtually nil.  Let's look at the plan in a little more detail and see why that's true.

Step 1 of the plan is for MI Developments to lend even more money to Magna Entertainment, on top of the $310 million or so that it's already lent.  The plan calls for a new $50 million loan for working capital, plus up to $75 million additional to pursue a slots license for Laurel Park in Maryland and build an interim casino if the license is approved.  So MI Developments would be on the hook for over $400 million in total.

And there's no assurance that, in fact, Laurel will get the slots license.  Maryland politics is nothing if not Byzantine, and Stronach may not have the right connections. According to the plan disclosed today, the $75 million for Laurel slots would be guaranteed by Maryland Jockey Club assets (Laurel and Pimlico) and would be repayable immediately if the license is denied, but where would the cash come from at that point?

Magna also convinced the Bank of Montreal to extend the due date on its $40 million loan to the end of March, 2009, in exchange for a $1.75 million fee.  If one adds up all the fees that Magna Entertainment has paid for multiple extensions of this loan, one might well conclude that it would have been cheaper to get the money from the nearest loan shark. At the same time, MI Developments has extended the due dates on its various loans to Magna Entertainment, totaling some $300 million-plus, to the same end of March deadline, in exchange for yet more fees. And, to conclude Phase 1 of the plan, Magna Entertainment made a cosmetic proposal to use "commercially reasonable efforts" to sell some of its reace track properties.

So, all of Phase 1 is actually about pumping more MI Developments money into Magna Entertainment.  Good for Frank, perhaps not so good for other shareholders.

Phase 2 of the plan is where things start to get problematic.  For this phase, approval by MI Developments shareholders is required, but, since Stronach controls MI developments, that's virtually assured.

In Phase 2, MI Developments, which is basically a real estate company, promises to buy Magna Entertainment's non-race track land in Aventura and Ocala, Florida and Dixon, California, plus the land underlying the Gulfstream Park hotel-shopping-condo development, at fair market value.  Wonder who's going to determine what that value is in a free-falling real estate market?  The Magna press release values the land at $100-120 million and says the proceeds will be used to retire the Bank of Montreal debt, but who knows? In addition, MI Developments would extend the due dates on its outstanding loans to Magna Entertainment to December, 2009 and would allow Magna Entertainment to pay off the loans not with cash but with -- surprise! -- Magna Entertainment stock.  Just what the dissident shareholders in MI Developments most wanted for Christmas. In exchange for agreeing to the loan extension and the ability to pay off the loans with possibly worthless stock, MI developments would get a promise from Magna Entertainment that it wouldn't ask for any more money from MI Developments unless the new loan was approved by the minority shareholders in MI Developments.  Such a deal!

In Phase 3 of the plan, we get to the wholly imaginary.  That phase would begin when Magna Entertainment pays off some $295 million in convertible subordinated debt.  Where the money to make those payments, due in 2009 and 2010, would come from is completely unclear, but only if those payments are made would Magna Entertainment pay off its debt to MI Developments (presumbly in stock rather than cash), issue new shares to Stronach and spin off Magna Entertainmnt shares now held by MI Developments to the MI Developments shareholders, who would presumably dump them as fast as possible. At that point, in some parallel universe, MI Developments would be out of the race track business, and Magna Entertainment would be directly controlled by Stronach.

Tech entrepreneur and would-be race track owner Halsey Minor has already criticized the proposed deal as "preposterous," pointing out that Magna entertainment can't possibly pay off the subordinated debt. At that point the whole deal falls apart and MI Developments is left with an even bigger, and unrepayable debt due from Magna Entertainment.

Minor had previously offered to buy up the MI Developments loans to Magna Entertainment, presumably with the intention of foreclosing on the race tracks. MI Developments ignored his offer, and today MI Developments CEO Dennis Mills failed to show up for a scheduled meeting with Minor in Baltimore.  Bad move.  As a review of Minor's career shows, when angered he becomes very tenacious.

Much more to come, I'm sure, but it's late, and I've already found more than enough reasons to conclude that the latest Stronach deal is just more smoke and mirrors, postponing the inevitable.

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