Despite mounting losses and lack of investor confidence, executives of racetrack operator Magna Entertainment Corp. remain confident the company’s fortunes can be reversed.
During MEC’s annual meeting in Ontario May 6, the company reported a first-quarter loss of $46.5 million, or 40 cents per share, compared with a $2 million profit, or 2 cents share, during the first quarter of 2007, ending March 31. Quarterly revenue fell 9.1% to $231 million, down from $254 million.
The first quarter historically is profitable for MEC because live racing is conducted during that period at its two flagship tracks--Florida’s Gulfstream Park and California’s Santa Anita Park. Problems at both tracks were cited by company officials for the staggering loss.
Santa Anita lost eight days of live racing due to heavy rains and drainage problems associated with its new synthetic surface. The quarterly report said that led to a $17.2 million decrease in revenues at the track when compared with the 2007 first quarter.
Revenues in Florida fell $1.5 million from the year-earlier period due to decreased attendance and on-site wagering at Gulfstream Park. The report noted those downturns were due to “perceived parking disruption” as a construction project continues on the premises and the loss of 21 days of turf racing due to heavy rains.
Additionally, a reduction of 12 live racing dates in Maryland operations and decreased attendance and handle at Laurel Park resulted in a $3.5 million decline in revenue in that state, when compared with the first three months of 2007.
MEC reported a loss of 11 cents per share on continuing operations and 29 cents per share on discontinued operations, which include Remington Park in Oklahoma, Thistledown in Ohio, Portland Meadows in Oregon, Great Lakes Downs in Michigan, and Magna Racino in Austria.
“I am very unhappy with the financial performance of the company,” MEC chairman Frank Stronach said. "I remain fully committed to implementing the company's previously announced debt elimination plan, and to seeing the operating results dramatically improved."
Stronach acknowledged MEC management “made some mistakes” and has had a problem with retaining management. But he is confident the current management team, which includes new directors of the hospitality and casino operations, has the necessary abilities to return the company to profitability.
“When you look at most other racetracks, they have the same problem,” Stronach said of management. “The philosophy is that we are going to go with younger guys who are specialized in certain areas… I would rather have a bunch of younger people and do hope one will emerge to be the future CEO. We won’t make the same mistake again that we hire someone for a high price and find out there aren’t the qualities there it takes to carry the company forward.”
Part of MEC’s strategy to reduce its indebtedness includes selling non-strategic real estate. Chief financial officer Blake Tohana, however, said weak U.S. real estate and credit markets "have slowed our progress to date on asset sales."
The other key to reducing debt includes a plan from Stronach to buy the racetrack operator for $25 million from MI Developments, MEC’s largest shareholder and a subsidiary of auto parts conglomerate Magna International.
The plan, which would see Magna Entertainment shares bought for $15.50 cash and stock of a restructured MI Developments, is expected to be considered by MID shareholders Wednesday, May 7. Under the proposal, MID would sell its 59% equity interest in MEC to an unnamed entity for $25 million, but would transfer $150 million in cash and loans to a limited partnership controlled by Stronach.
Greenlight Capital, which holds more than 10% of MID shares, called the proposal coercive, and said that it would result in an "outrageous payoff" to Stronach.
MEC has also filed a proxy statement seeking a reverse stock split that would have the effect of getting the per-share stock price above $1. Magna’s stock faces an Aug. 11 deadline to be traded for a value above $1 for 10 consecutive days or lose its listing on the NASDAQ exchange.
In his address to shareholders, Stronach said Magna and other racing entities continue to be negatively impacted by over-regulation.
“Obviously governments have a role to play in every aspect of society in regards to protecting the public,” Stronach said. “But our particular industry is way over-regulated. If you meet all the rules, we believe we should be allowed to open our racetracks when we will get the most customers, and we should be able to sell our product for the highest price the free market will bear.”
While some shareholders questioned the viability of MEC and the wisdom or undertaking the reverse stock-split proposal, others voiced their support for Stronach and his management team.
In a conference call with stock analysts later May 6, Stronach defended the company's investments in California, which also include Golden Gate racetrack. Responding to an anlyst's contention that the properties would be more valuable to Magna and its shareholders if sold for non-horseracing purposes, Stronach said, "In the short term, it would be. But we are not in the wrecking business."
If efforts to revitalize the financial picture of the California tracks are not productive, then MEC would consider alternatives.
"Our intention is to be in business and make a profit for our shareholders," Stronach said. "…We will give it a sincere try to find reasonable answers. If not, we have got to figure out how to preserve our assets and value for our shareholders."
Noting ongoing problems with the synthetic main racing surface installed at Santa Anita, Stronach said management is trying to determine if the water and drainage problems have been corrected and whether reports of kickback from the synthetic particles are harming horses or humans. If it is determined those problems cannot be fixed, he said the track would return to a dirt-sand track.
In retrospect, Stronach said MEC and Santa Anita should have responded to the California Horse Racing Board's mandate that all tracks install synthetic surfaces by telling the regulatory board they would comply, if the CHRB paid for the change.
Additional reporting by Ryan Conley