Proposal: MEC Parent to Sell Interest

A proposal would have MI Developments sell its stake in Magna Entertainment.

The parent company of Magna Entertainment Corp. has announced a proposal that would result in the sell-off of its controlling investment in the racing company to entities affiliated with company founder Frank Stronach.

MI Developments, a subsidiary of Stronach’s auto parts giant Magna International, would sell its 59% equity investment in MEC to an unnamed entity for $25 million, but would also transfer $150 million in cash and loans it has made to MEC to a limited partnership controlled by Stronach.

The deal would prohibit MID from doing further business with MEC, unless unanimous approval is gained from a new nine-member board of directors. Some shareholders of MID, which controls much of the land involved with Magna International plants, have long complained that MEC is dragging down profits.

One such institutional shareholder, Greenlight Capital, in 2006 lost a lawsuit in which it charged Stronach and others with shareholder oppression, but the case is scheduled for appeal April 21.

"Over the last three years, disagreements with certain of MID's shareholders have impacted our relationship with Magna International and, as a result, impaired our ability to grow our core real estate business,” MID president John Simonetti said in a news release. “While we have considered a number of possible solutions, they were ultimately not pursued due primarily to a lack of consensus among the various stakeholders.”

In advance of the court appeal, Greenlight Capital in a March 7 filing with the Securities and Exchange Commission said MID has ignored its 2005 proposal asking the company to dispose of its stake in MEC. The filing claimed MID is "vulnerable to a discounted, coercive ‘going private' takeover attempt by Magna or another Stronach-controlled entity.” Greenlight Capital president Michael Einhorn, and two affiliate companies collectively own more than 20% of MID Class A stock, according to the SEC filing.

MEC has lost more than $520 million in the last five years and is saddled with debt, including a $40-million loan from a Canadian financial institution that was due to mature March 31.

The release said the proposal, which must be approved by shareholder vote and would close no later than July 30, is supported by more than 50% of MID's Class A shareholders and 95% of Class B shareholders. Class B stock is regarded as a “super share” controlled by Stronach and other related entities that carry multiple voting rights.

“The reorganization proposal, which has expressions of support from both the Stronach group and a majority of our public shareholders, appears to offer a new opportunity to re-establish a strong working relationship with Magna International," Simonetti said in the release.

Separately, MEC filed a proxy statement March 28 that asks for a reverse stock split on its shares, which have been trading well under $1 since mid-February and face delisting from the NASDAQ exchange. The proposal, which also must be approved by shareholder vote, would consolidate shares on a ratio between 1-to-10 and 1-to-20. Thus, shares that were trading near 30 cents for the last couple of weeks would be valued between 10 to 20 times higher post-consolidation.

MEC shares must trade above $1 for 10 consecutive business days before Aug. 11, or the stock could be delisted.

“Failure to meet NASDAQ's continued listing requirements would result our...being delisted from NASDAQ, which in turn would likely decrease our attractiveness to investors and our ability to maximize stockholder value,” the proxy statement said.

In March 31 morning trading, shares of MID were up 15.2% to $29.11, while shares of MEC were up 6.3% to 34 cents.