Magna Packaging Properties to Drive Down Debt

Magna Packaging Properties to Drive Down Debt
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Officials with Magna Entertainment spent a good deal of time May 9 highlighting the company's continued attack on staggering debt, and how it will correct an admittedly disappointing start for the slots operations at Gulfstream Park.

At its annual gathering of shareholders in Toronto, MEC chairman Frank Stronach and CEO Michael Neuman outlined a list of properties the company intends to sell by the end of the year in hopes of eliminating a reported $559 million in debt with which the company is still saddled.

Included in the will-sell inventory of what is termed “non-strategic” assets are San Luis Rey Downs training center in California, the Bowie Training Center in Maryland, Great Lakes Downs in Michigan, the land for the proposed Dixon Downs racetrack in California, and excess land near Gulfstream and Golden Gate Fields, among others noted.

Stronach, who was later absent from a separate afternoon meeting with analysts discussing first-quarter earnings, told shareholders the properties could be sold separately, or as a group.

“I hope that we package that, and sell it by the end of the year,” said Stronach, estimating the value of the properties at between $400 million and $700 million. “That would allow us to wipe out most of our debt.”

Stronach estimated the company is annually paying $60 million in interest on the debt.

In a brief question-and-answer session that followed the annual meeting, not one shareholder asked about Stronach’s interest in acquiring automaker Chrysler through his auto parts conglomerate, Magna International.

Additionally, Neuman said additional MEC-owned properties could be considered for sale under a “variety” of circumstances.

Those mentioned, among others, were unspecified property associated with the Maryland Jockey Club, which includes Pimlico Race Course and Laurel Park.

“Despite $300 million of assets shed last year, we still have a half-billion dollars in debt,” Neuman said. “Clearly, we have lots of things to fix.”

An analyst reminded Neuman that Stronach a year ago predicted MEC would be debt-free by the end of the first quarter in 2007. The caller asked why anyone should believe a new plan for debt-reduction would work, and how the company is going to regain credibility with investors.

“It was clear to me as it is to you, in order to affect turnaround, you need to unencumber your balance sheet,” Neuman said. “The circumstances of the company as they’ve have changed over the ensuing year are such that the company did not undertake what I described as a very significant transaction to unencumber its balance sheet.

“Or, if in fact, the company decided to sell off property in piece-meal fashion while still accumulating $60 million in interest payments, it would never get its nose above water. Frank has reached a point where he wants this done as expeditiously as possible.”

Gulfstream’s poor performance in its slots operation was also heavily discussed at both meetings. Launched in November 2006, the net-win per machine steadily dropped from a high of $415 the first couple of weeks of operation to $74 during the last week of April.

Neuman blamed some of the problems on Florida laws that prohibit check-cashing and ATMs in slots parlors, but added that Gulfstream’s gaming venture was poorly marketed almost from the beginning.

“We didn’t have a sustaining marketing campaign,” Neuman said. “Gulfstream Park has been a pretty well-kept secret.”

Neuman noted that recently-passed Florida legislation that in part allow for ATMs and check-cashing in slots parlors will help, providing that they are signed into law by Gov. Charlie Crist.

Also discussed was the situation regarding such wagering outlets as TVG and Youbet.com, which have yet to reach distribution agreements with TrackNet Media Group, the joint content venture of MEC and Churchill Downs.

Neuman claimed a written offer was made to TVG several weeks before the Kentucky Derby Presented by Yum! Brands (gr. I), but said TrackNet has yet to hear a response. He said the offer to TVG basically consisted of sharing racing content each side controls.

“They have yet to counter our proposal,” Neuman said. “So there really is no negotiation at this stage, though we are interested in having a negotiation with them in some way."

Neuman said Churchill led by example in deciding to go away from TVG’s demand for exclusive contracts and formed TrackNet with MEC.

“I see no reason why other tracks wouldn’t follow suit,” he said. “And to TVG and their sub-licensee, Youbet, it puts them in a delicate position, I suppose. You are only as good as the number of tracks that you have under exclusive content, and those simply are a burning platform.

“It’s got to be an uncomfortable position for TVG to be in, and significantly more uncomfortable position for Youbet to be in, because they can’t even negotiate their situation, because they aren’t in control of whether TVG does or does not agree to reciprocate with us.”

MEC chief financial officer Blake Tohana reported that the company’s wagering outlet, XpressBet, added 3,600 new customers to its existing pool of about 25,000 during Derby week. He also said XpressBet handled $7.6 million in wager during that period, an increase of 147% over last year.

From financials, MEC reported earnings in the quarter of $2.5 million, or two cents per share, from $2.2 million, or two cents per share, a year ago. Revenue grew 2% to $284.2 million from $277.5 million in the prior-year period.

In the first quarter, the company sold three real estate properties for total proceeds of $65.1 million and repaid long-term debt of $35.4 million.

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