Archive for the ‘Breeding’ Category

By Ray Paulick

A Franklin County, Kentucky, Circuit Court judge has ruled against a proposed sale of a 20% interest in Horse of the Year Curlin to majority owner Jess Jackson for $4 million.

The ruling by Judge Roger Crittenden came in a hearing on Monday involving the 20% owned by disbarred attorneys Shirley Cunningham and William Gallion, who have been hit with a $42-million judgment in a civil lawsuit involving the fees they charged clients in a class-action lawsuit against  the manufacturer of a diet drug. Cunningham and Gallion also face criminal charges stemming from the case.

The ruling against the sale was not based on the judge’s disapproval of the $4-million appraisal on the 20% interest, but because two parties objected to the sale: Gallion and Cunningham’s attorney, Andre Regard; and the attorney for the class-action plaintiffs, Angela Ford.

The judge’s decision effectively ends a lengthy legal battle involving Jackson’s Stonestreet Farm’s and Cunningham and Gallion’s Midnight Cry Stable (also doing business as Tandy LLC). Midnight Cry originally owned 100% in Curlin and sold Jackson and two other partners an 80% interest after the son of Smart Strike broke his maiden early in 2007. Jackson eventually bought out the other two partners, Satish Sanan and George Bolton.

Regard said his clients were looking forward to being partners in Curlin as he enters his new career at stud at Lane’s End Farm in Versailles, Ky., where he will stand for a first-year stud fee of $75,000, payable when the foal stands and nurses. "He’s going to be a very popular horse," Regard said.

By Ray Paulick

The retirement of reigning Horse of the Year Curlin to Lane’s End Farm may be one of the more unusual stallion contracts with which the Versailles, Ky., farm’s owner, William S. Farish, has been involved. Farish said as much in an interview with the Paulick Report, although he would not go into details of the deal that was announced on Nov. 21.

Farish confirmed that Lane’s End did not purchase any interest in the Smart Strike 4-year-old colt, who will stand for $75,000 live foal as the property of Jess Jackson and the Midnight Cry Stable – at least until Midnight Cry’s 20% ownership interest is resolved in a legal battle that goes back to a 2001 diet-drug class-action settlement. The case revolved around the legal fees charged by plaintiff attorneys William Gallion and Shirley Cunningham, among others. The two men, who raced under the Midnight Cry stable and bought Curlin as a yearling for $57,000 in 2005, lost a $42 million judgment in a civil suit and face retrial on criminal charges of mail fraud after a previous trial ended in a hung jury. A third defendant was acquitted.

A court-ordered receiver has been charged with selling Midnight Cry’s 20% interest in Curlin, but the fair market value of the horse is in dispute. At a recent hearing, bloodstock consultant Ric Waldman estimated Curlin’s total value at $20 million, meaning Midnight Cry’s interest is worth $4 million – the amount Jackson and his wife, Barbara Banke, offered to buy it. Andre Regard, an attorney for Midnight Cry, said the figure is too low.

Because of the legal complications, it’s believed Jackson was unable to convey any breeding rights to Lane’s End, a standard part of most stallion contracts that gives the farm standing a horse a minimum of four to six annual breeding rights. In lieu of those rights, the assumption is that Jackson is paying Lane’s End an annual management fee, in addition to standard marketing and board fees. Unless the management fees are linked to Curlin’s stud fee (i.e., they increase if his stud fee increases), Lane’s End will not enjoy the potential upside it would if the farm owned shares or a percentage of the horse, or if the farm received a specific number of annual breeding rights.

Regard said he has requested a copy of the stallion contract from Jackson but has yet to receive it. He suggested the details of the contract could help establish Curlin’s true value. Regard contends that the $20-million appraised value is too low, based on the multiple of 267 times the initial $75,000 stud fee. Some stallions are valued based on a multiple of 400 (or even as high as 500) times the initial stud fee, Regard said.

Farish admitted the negotiations over Curlin were “difficult” because of the legal challenges. That Jackson and Farish ended up business partners on the horse is viewed by some as ironic, in light of Jackson’s crusade to reform the Thoroughbred auction business and his push to have bloodstock agents licensed. It is widely believed the politically-connected Farish used his clout in Kentucky’s legislative circles to restrict reforms and block the mandated licensing of agents.

Curlin was retired following his fourth-place finish in the Breeders’ Cup Classic, the only time in 16 career starts he finished worse than third. North America’s all-time leading earner, with $10,501,800 won in the United States and Dubai, will make a final public appearance this Saturday at Churchill Downs before joining his sire, Smart Strike, at Lane’s End.

Copyright © 2008, The Paulick Report

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By Ray Paulick

When Rob Whiteley managed the Foxfield commercial breeding operation for corporate raider Carl Icahn, he had to justify every dollar on the ledger sheets for the real-life Gordon Gekko. You couldn’t pull the wool over Icahn’s eyes on fiscal matters.

Today, free from Icahn, Whiteley runs his own operation, Liberation Farm, breeding and selling Thoroughbreds for the commercial market. He applies many of the lessons and disciplines he learned from his old boss. Coming out of the recent Keeneland September yearling sale, the most important marketplace for commercial breeders, Whiteley examined the profitability of the business he has dedicated himself to since leaving academia 25 years ago (his pre-racing resume includes Stanford, Rutgers, Harvard and the University of California at Berkeley).

The resulting article was published in the Thoroughbred Daily News last Friday, Oct. 3. If you haven’t read it, and you have any interest in the future of this business, Whiteley’s analysis is a must-read. (The TDN is a subscription-only site, but there is no charge for an online subscription.)

What Whiteley found may have been shocking to some, though not necessarily surprising to the many small, blue-collar breeding operations scattered across the rural landscape of Central Kentucky: breeders are bleeding red ink. Many of them face uncertain futures, even without the greater financial crisis brought on by tighter credit markets from the Wall Street/banking meltdown.

Whiteley found that fewer than one in five yearlings catalogued to the Keeneland September sale led to a break-even or profitable result for its breeder. He detailed the example of how a yearling produced through a $20,000 stud fee and selling for $70,000 at public auction (3.5 times the stud fee) does not cover all the expenses associated over the 30 months it took to plan, produce, raise and bring the horse to market.

The most profitable days of the September sale, of course, came at the front end, when not quite two of five yearlings catalogued (38% on days one and three, 37% on day two) broke even or sold for a profit. After the first eight sessions of the 15-day sale (in other words, all of the second half), profits were as thin as a Parisian runway model – the high was 14% of horses catalogued on day nine and the low 0% on day 15.

Worse, Whiteley’s expense assumptions in his profit-loss formula may be on the conservative side. He doesn’t factor in the general and administrative expenses that most businesses absorb or the three in 10 chance that a mare will have a non-productive year (barren, slipped or dead foal).

The problems breeders face are mounting. The price of hay, feed, fencing and vanning are quickly accelerating. Auction prices are retreating, and there is little being done on the national level to bring new end-users (horse owners) into racing. The industry is retracting on many fronts.

Not all breeders are affected equally. For those operations that are secondary businesses or hobbies for multi-millionaires or billionaires who inherited their money or made it in other industries, the losses may be used to write-off profits made elsewhere. Major breeders who stand high-end stallions have that lucrative end of their business to hold them up.

But where this hits especially hard is the backbone of the industry, the small mom-and-pop operations that may own a half-dozen mares, sell their best yearlings and race the rest. They don’t have income from other industries or trust funds to balance their spreadsheets, but they do, collectively, have a huge impact on the overall infrastructure of the horse industry.

Whiteley isn’t whining, and no one put to a gun to his head to buy all those mares he now owns (or co-owns with a bank). He also understands that free-market economics, and the laws of supply and demand, need to run their course. He didn’t publish his complaints without also coming up with what he believes is a short-term solution.

The article describes the industry’s “big three” as sale companies, the veterinary community and stallion owners, and suggests they will be the next group to suffer if the economics for breeders do not improve, and they are forced out of the industry. Fewer breeders will result in lower demand for stallion and veterinary services, and certainly lower profits for Keeneland and Fasig-Tipton.

Whiteley calls for an economic stimulus plan to be borne by the big three: for 2009 only, a 50% reduction in stud fees, a 50% reduction in the cost of services (and medication markup) provided by veterinarians and a 50% reduction in the commission collected by sale companies.

Of course the chances of this actually happening are somewhere between slim and none. Stallion owners will say their fees are based on demand, and veterinarians will cite their rising costs and the investments they’ve made in equipment and education. Sale companies will say they’ve got to making a living, too.

Something, somewhere has to give, or we will see a major exodus from the industry of small businesses. That won’t be good for anyone.

MORE BAD NEWS ON THE RACING FRONT. Turfway Park closed its fall meeting with significant declines in business, both on and off-track, where handle fell 18% and 20%, respectively. There were circumstances to the numbers being so far down (aren’t there always?), but they add yet another chapter to a very troubling sequence of bad economic news for the pari-mutuel side of the Thoroughbred industry.

Keeneland did a very good thing when it purchased Turfway Park and perhaps kept it from being developed for commercial use, though I’m not sure why it is necessary for the cash-rich company to have a partner in Turfway that has no interest in the success of horse racing (a casino company). Many blue-collar Kentucky breeders race their horses at Turfway Park, and the decline of the track since its purchase by Keeneland and partners has been yet another blow to those breeders, who are now shipping their horses to race out of state in increasing numbers to places like West Virginia and Pennsylvania.

Turfway needs an injection of capital and creative or intellectual investment that Keeneland so far is not providing. Investing in Turfway is one way of helping Kentucky’s breeders.

 Copyright © 2008, The Paulick Report

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By Ray Paulick

While Congress begins deliberations on the proposed economic bailout package that could cost taxpayers as much as $1 trillion, Thoroughbred owners and breeders are beginning to feel the effects of the turbulence on Wall Street and other world markets.

The financial markets meltdown came smack dab in the middle of the industry’s most important transactional event: the Keeneland September yearling sale. The sale began with a lowered price ceiling during opening select sessions that saw some resilience in the middle market, but, as many consignors feared, the bottom fell out after the first week. Most yearlings going through the ring in the latter part of the Keeneland sale will reflect economic losses to their owners once stud fees, mare investment  and boarding costs are taken into consideration.

But those losses are minor compared to what’s happened on Wall Street, which traditionally has created much of the wealth that’s found its way into the yearling market. “If anyone is dependent on new money in the horse business, I don’t think this is going to be a very good time for them,” one business analyst told the Paulick Report.

In addition, many yearling-to-juvenile sale pinhookers from Florida depend on bank loans to fund at least a portion of their investment, and those loans or lines of credit from banks are evaporating in the current crisis that actually began last August with the sub-prime mortgage fiasco.

Loans of all kinds will be more difficult to acquire, one banker told the Paulick Report, whether it’s for pin-hooking, stallion and mare acquisitions, or real estate. “A wide range of people need bank financing to buy farms or mares,” he said. “Some people who didn’t start off thinking they wanted to borrow end up taking out loans just like any other business often does. Stallion deals are often supported by banks. No matter what you are borrowing money for, it’s harder now and it will cost more. Everything is going to be more difficult.”

In addition, the banker said, many businesses with “standing operating lines of credit” are going to feel the crunch. “There are acquisitional and seasonal businesses. Some spend money all year and collect over just a couple of weeks. Stallion or mare purchases term out over a number of years.”

The crisis could have a severe effect on the bloodstock markets at Fasig-Tipton and Keeneland in October and November, especially for mares in the $50,000 and under price range. It is expected the top end of the market, which is unlikely to establish any new records for high prices, will maintain some semblence of strength. The deadline to enter mares and weanlings in Keeneland’s massive November breeding stock sale preceded the financial market meltdown. What will be interesting to follow is the number of horses entered for Keeneland’s January sale of horses of all ages. Will breeders look ahead at cutting their losses on marginal mares and newly turned yearlings?

The credit tightening comes as uninsured money market funds have disappeared into treasury bills and other secured investments. Banks that were counting on money market dollars to buy up bonds, mortgages and other loans now require cash on hand to extend credit to their customers. That cash, in many institutions, simply doesn’t exist in abundance.

“Things that have some value in the real world, like real estate loans, have no value in the market,” one analyst said. “Assets that used to be like cash no longer are like cash.”

Many in the horse business are watching how the crisis is affecting the financially troubled Magna Entertainment (MECA)  and its real estate affiliate, MI Developments (MID). Magna Entertainment is the racetrack operating company that is living month to month on bridge loans from MID and other creditors. Magna, controlled by Frank Stronach, owns Santa Anita Park (host of the 2008 and 2009 Breeders’ Cup) and Golden Gate Fields in California, Gulfstream Park in Florida, Pimlico and Laurel Park in Maryland, Lone Star Park in Texas, and Remington Park in Oklahoma, and several smaller tracks. Its stock, battered in recent years and recently the subject of a 1-for-20 reverse split to retain its listing on the exchange, has declined by 25% in the last five trading days, closing Monday at $4.39 per share.

Copyright © 2008, The Paulick Report

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