Letters Critical of MEC's Economic State

San Francisco-based institutional investor Farallon Capital Management and technology entrepreneur Halsey Minor are separately asking MI Developments, Inc., for a major financial shake-up of the racing conglomerate Magna Entertainment Corp. MID is the controlling shareholder of the debt-laden racetrack owner.

In a letter to MID dated Oct. 17, Farallon Capital Management said it believes MID should "end its support" of MEC, which it termed "a sinkhole." Farallon, which owns 8.5% of the Class A shares of MID, included the letter to MID’s board of directors in a filing that day with the Securities and Exchange Commission. MID and MEC are both based in Aurora, Ont. MEC owns Santa Anita Park, the site of this weekend’s Breeders’ Cup World Championships, Gulfstream Park, and seven other U.S. Thoroughbred tracks.

Frank Stronach, the founder of MEC, is chairman of MID and MEC.

Farallon’s letter said its options include "all legal tools available" as a shareholder. It said it believes there is "no justification" for MID’s Oct. 15 announcement of expanding a bridge loan to MEC from $110 million to $125 million and extending the loan’s maturity date from Oct. 31, 2008, to Dec. 1, 2008.

Also on Oct. 15, MEC announced that Bank of Montreal has extended the due date of a $40 million senior secured revolving credit facility from Oct. 15, 2008, to Nov. 17, 2008. The loan is secured partly by certain assets of MEC and its tracks, including some at Santa Anita Park in Arcadia, Calif.

Minor, in a separate Oct. 17 letter to MID’s board, offered a more direct solution. He has offered to buy the bridge loan and other inter-company loans MID has made to MEC. In his letter, Minor noted that he had previously contacted MID’s board about his interest in buying loans including the full amount due under the bridge loan. He told The Blood-Horse that MID had not responded to his inquiries, including a request for his advisors to perform due diligence on the loans.

"It (MEC) has been a cash incinerator for MID," Minor said. "I would expect they would be thrilled to at least consider my inquiries."

Minor is the founder of CNET Networks. In 2004 Fortune magazine estimated his net worth at $286 million from investments in CNET and other Internet and technology companies. He also owns several Thoroughbreds including the filly Dream Rush, who won four graded stakes as a 3-year-old in 2007. Dream Rush is pre-entered in the Sentient Flight Group Breeders’ Cup Filly & Mare Sprint on Oct. 24.

Farallon officials declined to comment beyond the firm’s letter and SEC filing. Officials of MID were not immediately available for comment on Oct. 20. In its letter to MID directors, Farallon said it feels that MEC is "near bankrupt," adding: "MEC has been, is, and will remain a financial sinkhole."

According to its most recent financial reports, MEC lost $67.7 million during this year’s first six months. Through June 30, MEC reported it had an accumulated deficit of $577.8 million with a working capital deficiency of $151.1 million, and a debt load of $229.8 million due to mature this year.

Farallon said it "wishes to go on record" to what it considers a possible "ill-conceived transaction" of MID buying MEC. The investment firm said it is "suspect of any rationalization" that MID buying MEC and selling off assets would offer a more cost-effective route to value for MEC than a bankruptcy proceeding or another court-supervised process.

Farallon said it believes it is urgent for MID’s board to end the company’s support of MEC and work with management on developing "a coherent and fair reorganization plan" for MEC.

Farallon’s letter concluded: "You must tell Mr. Stronach that his time for self-serving maneuvers is over. It is time for you to meet your fiduciary duties as directors. If you do not, Farallon will consider all legal tools available to it as a shareholder."

Minor on Oct. 19 told The Blood-Horse that he contacted Farallon’s managing member, Richard Fried, on Oct. 17, after he learned of that firm’s letter to MID. But Minor said he plans to keep his interest in buying MID loans separate from Farallon’s dealings with that company.

Minor got the horse industry’s attention earlier this year by offering to buy Hialeah Park in Hialeah, Fla., from its owner John Brunetti so he could completely renovate the historic track.

Late last month, Brunetti rejected Minor‘s first offer for Hialeah Park, which last held races in 2001. Neither would disclose the price Minor offered or the price Brunetti is requesting. But Brunetti said on Oct. 1 that Minor’s offer was "in the same range" as the $22 million purchase price when he bought the track in 1977.

"I would be ready to meet with John again if he can give me some economic substantiation for his asking price," Minor said.

"Maybe I’ll bump into him," Minor said when asked if he expects to talk with Brunetti at the Breeders’ Cup.

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