Thursday, March 5, 2009

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. 

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