MID Shareholder: Foreclose on MEC Loans
by Ryan Conley
Date Posted: 2/24/2009 8:02:44 PM
Last Updated: 2/25/2009 11:10:11 AM

A prominent shareholder is asking MI Developments to foreclose on loans it has with its subsidiary Magna Entertainment Corp. if and when those credit agreements go into default, in hopes of recouping some of its investment in potential bankruptcy reorganization.

Farallon Capital Management and affiliate entities, which collectively control 5.5% of MID’s Class A shares, claims in a filing Feb. 24 with the Securities and Exchange Commission that the foreclosure of about $175 million in loans extended to MEC would allow for “some value” to be realized from an ensuing bankruptcy by the horse racing company. The referenced loans, which are part of other financing MID has extended to MEC through the years, are scheduled to mature March 20.

The letter was written in critical response to a Feb. 18 announcement by both MID and MEC that a reorganization plan aimed at spinning off the horse racing entity had been scrapped, with Farallon taking umbrage with the disclosure that altenative plans were being discussed. Both companies, which are each chaired by Frank Stronach, in part blamed poor credit markets caused by the downturn in the economy as reasons for nixing the plan.

“The folly of providing additional financial support to MEC is not just a function of current market conditions,” said the letter signed by Farallon’s Richard B. Fried. “MEC could not operate profitably during the recent real estate and gaming boom; it certainly will not be profitable now that those sectors are deeply depressed. In fact there is no realistic prospect that MEC will ever be financially viable.”

The letter claims MID’s stake in MEC was once valued at more than $350 million, but now  is worth less than $2 million, and that more than half of MEC’s $600 million in debt is owed to MID.

“That the Board has authorized over $300 million in loans in a failed attempt to prop up this equity only highlights the foolishness of the two companies’ entanglement,” the letter said. “There is no possible justification for (MID) to deepen that entanglement by lending more money to, or accepting equity in, MEC.”

In announcing the halt of the reorganization plan, both MID and MEC said they were in “discussions” to consider alternatives, but “cautioned” investors about trading in either of the companies’ stocks.

The letter from Farallon closed by saying it was "watching the (MID) board closely."

"We are prepared to vigorously protect our rights as a shareholder if the board does not fulfill its fiduciary duties in the weeks ahead," it said.

Farallon Capital Management, which is based in San Francisco, has joined another large MID shareholder, Greenlight Capital, in voicing displeasure with investments in MEC. Greenlight Capital, which is headed by shareholder activist David Einhorn, openly criticized the reorganization plan in a letter filed Feb. 10 with the SEC.



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