MEC's Parent Company May Step in Again

MI Developments said MEC needs to sell assets as quickly as possible to reduce debt.

The parent company of Magna Entertainment Corp. said during a March 5 conference call that the racing and gaming company needs to sell off assets as quickly as possible to drive down debt, and may not be able to repay loans that are set to expire in May.

MI Developments, which controls MEC as a subsidiary of ultimate parent company Magna International, disclosed during the earnings conference call with analysts that it may once again need to lend financial support to keep MEC afloat as it strives to reduce debt.

Unlike a Feb. 29 MEC earnings conference call in which chairman and interim chief executive officer Frank Stronach conducted an abbreviated question-and-answer session, MID CEO John Simonetti spent significant time responding to queries about the struggling horseracing company.

“The results were not good,” Simonetti said of recent disclosures of MEC financials that declared the company had posted multimillion-dollar losses for the sixth straight year. “And the company continues to significantly under-perform. MEC’s board and management are aware of the ongoing multi-faceted operational challenges facing the company, which together with its significant debt load, continues to result in unacceptable and unsustainable losses.”

MID officials reported that MEC’s total outstanding debt has reached $247 million, and that it is unlikely the company will be able to satisfy a significant chunk of that load when certain loans mature May 31. Due on that date is the balance of an $80-million bridge loan MID extended last September to fund MEC business operations and pay mandatory interest payments, as well as a $100-million construction loan used to finance the ongoing redevelopment of Gulfstream Park.

There is also a $40 million senior credit facility with a Canadian financial institution that is scheduled to mature March 31. According to company filings with the U.S. Securities and Exchange Commission, that loan is "secured by a first charge on the assets of Golden Gate Fields and a second charge on the assets of Santa Anita Park, and are guaranteed by certain subsidiaries of the company."

“We recognize that MEC will need to seek additional funds in the short term from one or more additional sources in order to give it more time to sell assets and pay down debt,” Simonetti said. “And in this respect, (we) continue to evaluate the possibility of MID providing further assistance to MEC.”

MEC last September unveiled a plan to sell racetracks and other assets in an effort to raise up to $700 million to pay down debt. Simonetti said the current U.S. real estate market has hampered efforts to realize significant results from the plan.

“Given the state of the overall U.S. economy, MEC couldn’t have picked a worse time over the past two years to try to sell significant blocks of real estate,” he said.

Simonetti wouldn’t give specifics on what help MEC may receive from MID, which, like Magna International, is chaired by Stronach.

“I think MEC needs to sell a lot of assets in a very short period of time,” he said. “Is that period of time over the next month, or over the course of the next eight to 10 months? I think they should, as quickly as they can. But even so…we will take the time to consider alternatives.”

One analyst resurrected a question frequently asked at MEC conference calls--that of when a permanent CEO will be hired for the company. Stronach is currently in his third stint as interim CEO of MEC, which has seen five such executives come and go since 2000.

“It’s a unique business and trying to find someone with all of those talents hasn’t been easy,” Simonetti said. “There are few horsemen with that knowledge of that industry, to really bring more of a business view of how to run that business. It’s not solely horses -- it’s slots, it’s gaming, it’s entertainment. Then you have the technology side of the business as well. It’s difficult for MEC to find someone with that broad knowledge.

“Having said that, I think MEC has arrived at a point where maybe what you need there is someone with a lot more, at least in the short term, someone with some turnaround experience. And that would take a critical look at all of the operations, and how to best package this company going forward, and then start growing again.”

Another regular topic during company conference calls is the disappointing performance of Gulfstream, with slots revenue failing to meet all expectations. Simonetti said discussions with experts have analyzed the pros and cons of the racino set-up.

“They have said, clearly, the slots operation has to be separate from the clubhouse and built differently,” he said. “At the same time, we do have conversations with gaming people who see upside to the slots operations as they are today, and so if you can strike the right partner or reconfigure things properly at Gulfstream, we still believe that you can get those net wins up and produce a profit there.”

The question-and-answer period also featured an exchange with MID antagonist David Einhorn of hedge fund Greenlight Capital, which is believed to hold about a 10% stake in MID. Greenlight has in the past asked MID to sell off its MEC holdings, and in late 2006 lost a Canadian lawsuit in which it claimed the company improperly used investor funds to build MEC’s racing empire. An appeal on that decision is scheduled to be heard in April.

In seeking updates about several proposals he made in 2004, Einhorn asked Simonetti if the company was working to “minimize the possible adverse impact” of MID’s investment in MEC.

“Clearly, they have issues. Everybody knows that,” Simonetti said. “But at the end of the day, David, right from the start we had a significant investment, which we made very clear. We think there is still opportunity there, although I will admit it has been trying to get them to turn around and improve the operations. Whatever financing we have put in place, we have done so prudently. And we will have to see what we do this go around.”

Despite the trials of MEC, MID reported a profit for 2007, though at $39.5 million, it was 34% lower than the $59.9 million realized in 2006. Year-over-year revenue increased 7.6% to $794.6 million.