Magna Finally Faces Up to the Market

Probably figuring that its latest SEC filing would be thoroughly ignored amid all the focus on its bankruptcy, Magna Entertainment (MEC) filed a Form 8-K yesterday with the Securities and Exchange Commission in which it finally admitted that some of its race tracks and land holdings aren't worth anything like what Frank Stronach paid for them not all that long ago.

The 8-K, which is required whenever there is an event that materially affects a company's business, reports that on Monday MEC's audit committee approved a $136 million write-down in the value of the company's assets. In particular, the write-downs included the value of racing licenses for Lone Star Park in Texas, Golden Gate Fields in California, and the Maryland Jockey Club's tracks, Laurel and Pimlico. Other reductions in value were allocated to The Meadows harness track, to the now-shuttered operations at Portland Meadows and at Stronach's Austrian Racino, and to the value of land that MEC owns in Dixon, California, once the intended site of a thoroughbred track.

No mention in the SEC filing of the value of Santa Anita, Gulfstream or other Magna properties.  But the unforgiving nature of bankruptcy proceedings may sooner rather than later show exactly how much of the value of MEC's assets as carried on its balance sheet has any relation to the real world.

Carolina Fuego Wins At Aqueduct

Most of what I write here focusses on the big picture in racing -- how Magna, Churchill or NYRA are doing, what's happening at the sales, what the economics of various niches in the racing industry are like.  But every once in a while it's fun to just celebrate being part of this great game.  Today was definitely one of those days.

My partnership operation, Castle Village Farm, had been pretty quiet over the winter. We'd retired a couple of horses, sent our better runners off for winter vacations, and had a couple of babies getting ready for their debuts.  And the there was Carolina Fuego.  We'd claimed her as a three-year-old back in June of 2007, and in 17 sytarts before today, she'd been in the money eight times, including a good second in the 2007 Delaware Certified Distaff Stakes. But she hadn't won for us, and the partners were, understandably, getting restless. In fact, back last summer, when her performance tailed off, we'd decided she needed a rest after two straight years at the race track, and gave her a couple of months of R&R at an equestrian facility on Long Island, just for a change of pace.

We brought her back to the races last month, and, despite being left flat-footed at the start, she made a nice run through the stretch to get third.  Today, we entered her back in a claimer for horses that hadn't won in six months -- in most cases, they hadn't won in a lot longer than that -- and she came through for us.

Sent off by the public at Aqueduct at an overlaid 11-1, Carolina bided her time toward the back of the eight-horse field, moved up into the turn, and pushed through to the lead in the stretch.  She then held off a late challenge and prevailed by almost a length.

Lots of high-fives in the box area, where a dozen of us were watching. Lots of smiles in the winners circle, and lots of win photos for the two dozen other partners who couldn't find a good enough excuse to get out of work and come to the track today.  And lots of appreciation for Leah Gyarmati's training and Sheldon Russell's very smart ride.

Sure, the first at Aqueduct on a winter Wednesday isn't the Kentucky Derby, or even the Empire Classic.  But, if you're in this game, there's nothing better than a win.

Mr. Stronach: Build Up That Wall!

For those too young too remember, or old enough to have forgotten, one of actor Ronald Reagan’s best lines as President, delivered on a visit to Berlin, was “Mr. Gorbachev, tear down that wall!” And when the Berlin Wall was indeed torn down – by ordinary Germans rather than by Mikhail Sergeyevich – Reagan’s credentials as an anti-Communist were assured.

Frank Stronach seems to have learned something from Reagan as well.  If nothing else, Magna Entertainment’s bankruptcy filing today was a remarkable exercise in tearing down walls, especially the walls that are supposed to exist between different corporations with different sets of shareholders.

[The Magna bankruptcy has been dutifully, and reasonably well, covered by the racing press and by the leading newspapers in areas where Magna tracks are located.  The best of the stories are collected at The Paulick Report and at Raceday 360, and quite a lot of detail is available on Magna Entertainment’s own web site.  I’ll try not to repeat any more of that coverage than is absolutely necessary.]

The most unusual aspect of the bankruptcy filing is that “DIP” (for debtor-in-possession) financing to fund continuing operations of the Magna tracks and affiliated companies is being provided not by a commercial or investment bank, or even by a financing company like GE Financial.  Instead, the DIP financing, to the tune of $62.5 million, is being provided by MI Developments (MID), another Stronach-controlled company, which had already lent several hundred million to Magna Entertainment, over the strenuous objections of its minority shareholders.

DIP financing occupies a special, privileged place in bankruptcy proceedings.  Typically, the DIP lender gets a security interest in all the debtor’s assets and moves to the head of the queue of those entitled to repayment. Since MI Developments is already the single largest creditor of Magna Entertainment, one might have thought that MI Developments already had a fairly strong position in the bankruptcy, but Stronach apparently wanted to ensure that his own company wouldn’t have to take second place to any mere bank.

But wait, there’s more.  Not only did MI Developments provide the DIP financing that will keep Magna tracks’ doors open, but it also submitted a “stalking horse bid” for some of the Magna Entertainment assets that will, presumably, be disposed of as part of the bankruptcy proceedings.  Specifically, MI Developments offered a total of $195 million -- $44 million in cash, $15 million for assuming a Magna Entertainment lease and $136 million in partial payment of MEC’s existing debt to MID –- for Golden Gate Fields, Gulfstream (including MEC’s interest in the Gulfstream condo/retail extravaganza), the Palm Meadows training center, Lone Star Park, AmTote and the XpressBet online and phone betting operation.  So, if no other bidder emerges for these assets, MI Developments will end up with them, and Stronach will still have large parts of his tottering empire under his control.

The MID stalking horse bid does not include Santa Anita, the Maryland Jockey Club (Laurel and Pimlico), Remington Park, Thistledown or Portland Meadows.  Nor does it include MEC’s Austrian interests or its real estate in Ocala and Dixon, California.  And it excludes MEC’s interest in the TrackNet simulcasting partnership with Churchill Downs, Inc. Apparently even the captive directors of MID thought that to take on all of MEC’s assets, which have, in the aggregate, produced losses of some $600 million since Stronach got into the race track business a decade ago, would be going too far.

The effrontery of it all takes one’s breath away.  Stronach runs his race track operations into the ground, props them up with money from the real estate company, MID, that he controls, then puts MID in a position to emerge with a bigger share of the debt than outside creditors and with a substantial chunk of the assets.  If he succeeds, it’ll become part of bankruptcy lore that will be taught in the casebooks for years to come.

Of course, there’s always uncertainty any time one goes to court.  Who knows, the bankruptcy judge (the case was filed in the US bankruptcy court in Delaware, a state that, I hear, might even have a race track) may actually know something about racing. There are seven judges on the bankruptcy court in Delaware, and I haven’t seen anything indicating which of them will be handling the Magna case.  Judges in the corporate milieu that is Delaware should, though, be thoroughly cognizant of the corporate shenanigans in evidence in the Magna case. And if the minority shareholders in MI Developments can find a way to make their views known, perhaps the court will be able to rebuild some of those walls that Frank Stronach has so assiduously torn down. 

A Closer Look at the Calder Sale Numbers

Given the economic climate, the Calder sale of two-year-olds in training yesterday could have been worse, but for most of the pinhookers and other sellers, it was bad enough.

The sale, always the most prestigious and most expensive juvenile auction, had a total of  272 horses in the catalog, the same number as last year.  But final figures show a total of 111 horses sold for gross receipts of $25.2 million.  That's 25% off last year's gross, and, because more horses were reported sold than the 102 in 2008, the average and median price declined by more, 31.5% for the average and 34.8% for the median, compared to published 2008 results. 

Boyd Browning, CEO of auction company Fasig-Tipton, was quoted in the Blood-Horse as saying that the sale "wasn't as bad as my worst fears, and it wasn't as good as I'd hoped for." In fact, if you look critically at the numbers, it was a good deal worse than appears on the surface, bad as that appearance is. At least three factors make the published results less than completely transparent.

First, Fasig-Tipton for the first time this year reported private sales made on the sales grounds and booked through the auction house as "sold" for purposes of the results totals.  It's common at sales for horses that fail to meet their reserve to be sold privately soon thereafter (usually at a discount off the final bid) as consignors weigh the risks of trying to take the horse home and sell it somewhere else. Often, these sales are processed by the auction company, which helps to assure the consignors that they're likely to get paid.  But, until this year, those horses had been reported as RNAs, which is, in fact, what they were.  By changing the reporting treatment, Fasig-Tipton was able to raise its total of horses sold from 102, the same as last year, to 111.  If Fasig-Tipton had stuck to the reporting methods of prior years, the Calder sale's buy-back rate this year would have been 40.7%, pretty much the same as last year's 40.4%.  Instead, by including the post-auction private sales in the totals, F-T was able to show a decline in the buy-back rate to a somewhat more respectable 35.4%.

Here's a comparison of the Calder results, adjusting the 2009 figures by taking out the horses that were reported as RNA's sold privately:

Sold:                 102 (same as in 2008)

RNA:                   70 (same as in 2008)

Buyback %:       40.7% (0.3% worse than in 2008)

Gross:               $25,226,000 (down 28.1% from 2008)

Average:            $247,313 (also down 28.1%)

(For those who want to check my arithmetic, or see if they can find even more anomalies, the horse-by-horse sales results are here.)

The differences from last year are not earthshaking, but if there's one thing we should have learned from the past year's financial turmoil, it's that we should insist on understanding the numbers produced by any company, and ensuring that when comparisons are made, those comparisons are truly of apples to apples.

The second reason for questioning the published results of the Calder sale is common to just about every horse auction: the key percentage that never gets reported in news of the sales is the percentage of the total catalog that is actually sold.  At Calder this year, there were 272 horses in the catalog, but only 172 of them even went through the auction ring; 100 were scratched before, or during, the sale.  So the true number of horses sold at Calder is 111 -- the 102 that were actually hammered down in the ring plus the nine RNA private sales. That's barely 40% of the horses that started out in the catalog.  True, some of the scratches were likely the result of injury, as happens even in the best of years, but, as has been happening all of this year’s sales, a lot of them were for economic reasons, as consignors realized they would be getting nowhere near the price they wanted and, rather than be embarrassed in the sales ring, began searching for other options.

Horses that failed to sell at Calder may get one more chance later in the sale season, but from now on, at the OBS sales in Ocala in March and April, at Barrett's in California in March, at Keeneland in April, and at Timonium in May, there aren't any second chances.  With nowhere else to go, it's likely that consignors will lower their reserves still further and make more post-auction private deals, with the result that average prices will be falling even further. 

The third factor that helped to keep Calder sale results respectable, if not great, was the very significant investment that Fasig-Tipton's new owners – a corporation called Synergy Ltd., which, if not outright owned by Sheik Mohammed, is closely associated with him -- made to treat prospective buyers well, including a new tent in the parking lot with areas for watching breeze videos, logging onto the internet, and, most important, eating. Free, and good, food provided by the auction house is a welcome addition to the sales scene.  Even more imprtant was the help that Fasig-Tipton provided to bring European and Japanese buyers to Calder, including paying some of their travel expenses.  These innovations, or, rather, borrowings from the best practices of auction companies in Europe, Asia and Australia, are a welcome addition to the auction scene (I'm waiting to see what Fasig-Tipton has in mind for the terminally gloomy sales pavilion at Timonium), but the greater than normal presence of foreign buyers as a result of Dubai's ownership of Fasig-Tipton and its willingness to spend money to make money probably did raise the Calder results above what they would otherwise have been.

Another sign of Dubai’s interest in having the sale go well was the presence, and strong purchasing, of bloodstock agent par excellence John Ferguson, who represents Sheikh Mohammed and related Dubai interests.  Ferguson was listed as buying six colts, including the only three horses that sold for $1 million or more at the sale. The six he bought averaged $865,833, close to four times the sale's overall average price of $235,595. 

Ferguson has been an important presence at the Calder sale for many years; he was the under-bidder in the infamous 2006 duel to acquire the then- and still-maiden The Green Monkey, who went to Demi O'Byrne of Coolmore for $16 million.  But one wonders whether Ferguson's spending spree this year was, at least in part, a result of Dubai's Synergy Ltd.'s purchase last year of the Fasig-Tipton auction company.  It would, to say the least, have been an embarrassment for Dubai's ruler had his newest acquisition in American racing failed miserably at one of its two flagship sales (the other is the Saratoga yearling sale in August).

The colts that Ferguson bought at Calder were very nice thoroughbreds, and had he not been there, they would have sold for serious money.  But perhaps not so serious as with his presence.  The other prospective buyer at the top of the market, Coolmore's O'Byrne, was conspicuous by his absence from the Calder sales results. Just a guess, but perhaps $1 million or so of the gross at Calder could have been the result of Ferguson's upholding the honor of his employer. 

Pinhookers were hit pretty badly by the Calder outcome, except for those lucky, or smart, enough to have the horses that John Ferguson wanted. Back last September, when the pinhookers were buying yearlings, prices were down only 10-15% from the previous year. Now they're down more than 30%. That has to squeeze the pinhookers' margins, and makes the outlooks for this coming summer's yearling sales even bleaker