MAGNA: HOW DID WE GET HERE?
By Ray Paulick
(UPDATE: Magna Entertainment filed for Chapter 11 bankruptcy protection today. Click here for the company press release, with details on the filing.)
What a long, strange trip it’s been.
Hard to believe, but it’s been just over 10 years since Frank Stronach dove head-first into racetrack ownership with his December 1998 purchase of Santa Anita Park. Or perhaps I should say he did so with his company’s purchase of Santa Anita, since the 76-year-old Canadian auto parts magnate and Eclipse Award-winning owner and breeder has been careful not to spend too much of his own money on any of the racetrack ventures.
The strong-willed Stronach was hailed by many, including this writer, as a savior when he first rode into Southern California and purchased Santa Anita for $126 million. The historic racetrack was then owned by Meditrust, a real estate investment trust that had little to no interest in horse racing, and there were concerns about the sport’s future at the “Great Race Place.”
Stronach had big plans: a new stable area; a gated community to replace the infield parking lot; a grand entrance hall of sorts where horses of all breeds would be in the spotlight and robust women in lederhosen would serve an endless supply of cold beer. “I have no plans to move the mountains,” he joked, in a reference to the San Gabriel Mountains that serve as one of American horse racing’s most beautiful backdrops amidst concerns that he was going to change Santa Anita too much.
One of his biggest early supporters was the late Bob Lewis, a major horse owner and industry leader who had been going to the races at Santa Anita for decades. At a meeting Stronach conducted with horsemen who were worried that Santa Anita’s traditions would be thrown out the window, Lewis stood up and said:“Frank, you and I have had our arguments on the track, but as an owner I want to thank you for your magnanimous willingness to go ahead with your plans for Santa Anita. You’re going to be a breath of fresh air for this place.”
Stronach invested in some capital improvements, adding the new Frontrunners restaurant atop the grandstand and making Santa Anita’s track apron more appealing for railbirds. But big plans for a new stable area and other improvements were put on hold while he turned attention to his growing appetite for additional acquisitions.
He purchased Gulfstream Park in July 1999 for $95 million from a Japanese company that, like Meditrust, wasn’t interested in horse racing. Optimism abounded that racing in South Florida would improve. He also acquired land in Palm Beach County north of Gulfstream and built a state-of-the-art training center.
Then came deals to buy Golden Gate Fields along with the racing license for Bay Meadows in Northern California (though not the land on which the track was located); Thistledown in Ohio and Remington Park in Oklahoma; Portland Meadows in Oregon; Lone Star Park in Texas; and Laurel and Pimlico in Maryland. He also built Magna Racino, a racetrack/casino in his native Austria (since closed), and purchased plots of land for the possible development of a new track in Northern California and another in north central Florida. He started a racing cable network, HRTV, and an account-wagering company, Xpressbet. Once, when he disagreed with something I wrote in Bloodhorse magazine, he threatened to buy that publication – and he was serious.
There were rumors Stronach was set to purchase Suffolk Downs near Boston, Emerald Downs near Seattle, Monmouth Park in New Jersey, even Fairmount Park in Southern Illinois, among other tracks. In some ways, he looked like a kid in a candy store, and racetrack owners everywhere who were looking to unload their properties were hoping to catch his eye.
By now, Stronach’s racetrack interests were part of Magna Entertainment (MECA), a publicly traded spinoff of his Magna International (MGA) auto parts company that was formed in March 2000. A few years later, another Magna International spinoff, MI Developments (MIM), the real estate branch of the parent company, became the majority shareholder of Magna Entertainment after large shareholders in the auto parts concern protested that too much of their money was being invested in racetracks.
Stronach controlled the majority of the voting shares in all of the companies because of how they stock was structured into different classes. That allowed him to handpick board members and run the companies the way he saw fit. R.D. Hubbard, a very savvy businessman and racetrack owner who has had more than a few boardrowom battles of his own, told me very early on that only a fool would make a serious investment in a company that sells a majority of its stock in non-voting shares.
There was a constantly revolving door of top managers at Magna Entertainment and at many of the company’s racetracks that made it nearly impossible to ascertain who was in charge. (Click here for a partial roster of former Magna executives.) Some good people were brought in, but were never given the chance to manage without Stronach’s hands-on supervision. Other hires were head scratchers, including the appointment of former jockey Chris McCarron as general manager of Santa Anita. Stronach even called me once to see if I was interested in running one of his racetracks, something in which I had no experience or interest. I politely declined.
Interestingly, this is not how Stronach ran Magna International or his hugely successful breeding and racing operation, Adena Springs, where management was stable for years.
Stronach himself seemed to be afflicted with attention deficit disorder, lurching from one idea or project to another. All the while Magna Entertainment was accumulating massive debt that now totals $600 million and losing hundreds of millions of dollars. “We’re turning the corner,” he would say to increasingly skeptical analysts during conference calls to review financial results. Sometimes his focus bordered on the bizarre; witness his dive-off-the-deep-end launch of Frank’s Energy Drink, which now appears to be about as successful as his racetracks. Or his latest missive on how there should be changes in determining winners of Eclipse Awards, something Stronach wrote just days before Magna defaulted on the first of several debt obligations coming due this month.
In the early years, he seemed to love the limelight that came with owning racetracks. At a public forum at Gulfstream Park in 2001 that he used as a platform to publicize his views on the industry, Stronach said with glee, “I can’t wait to tear this place down.” Sure enough he did, rebuilding what many thought was a perfectly good grandstand and spending hundreds of millions to create a racetrack (and now casino) that is widely detested. He made similar promises to tear down and rebuild Pimlico, which would have been applauded, but those plans never got off the drawing board. Of course, Magna’s history in Maryland has been tainted by their recent folly in failing to file an adequate slot machine application for Laurel, after voters approved a statewide referendum last November. The company is now the laughingstock of the Free State.
Stronach also used his prominent position as owner of the nation’s largest racing company to air his differences with the National Thoroughbred Racing Association and Breeders’ Cup, calling for democratic elections to the organizations’ boards of directors (while overlooking the fact that his own companies weren’t democratic because of the different classes of voting and non-voting stock). His ideas did have merit, and he deserves credit for helping bring greater transparency to some racing organizations.
Stronach once told me that he would “create his own Breeders’ Cup” because of differences he had with that organization. A couple of years later, he made good on that promise, creating the Sunshine Millions, an annual event at Gulfstream and Santa Anita that matches Florida-breds vs. California-breds.
The late Bob Lewis, his onetime supporter, began to publicly criticize Stronach’s comments about the NTRA and other industry initiatives. “Frank got mad and stopped talking to me after that,” Lewis told me. Then, with his broad, trademark smile, Lewis added, “So, naturally, whenever he’s at Santa Anita I go out of my way to reach out my hand and say hello to him.”
Clearly, Stronach can no longer be having fun as a racetrack owner. Though sources complain that he has surrounded himself with “yes” men at the corporate level — executives like Dennis Mills, CEO of MI Developments — he cannot help but hear the criticism that has come his way from racing fans, horsemen, state regulators, and shareholders in his various companies.
Magna Entertainment is teetering on the verge of bankruptcy, and institutional shareholders in MI Developments are threatening legal action if they feel that company’s board of directors breaches its fiduciary responsibility by extending additional credit to Magna Entertainment. Though some of its tracks are performing moderately well in this desperate economy, it’s too little too late, and the debt load is more than the company can absorb.
It’s sad, really, when I think back to the energy (sans Frank’s Energy Drink) and commitment Stronach brought to this endeavor 10 years ago. He had ideas – some good and many bad – that he felt could help reinvigorate racing. I have no doubt that his intentions were always to make Thoroughbred racing more appealing and successful. But his appetite for domination of the industry and his “my way or the highway” management style were a recipe for disaster. Several former Magna executives told me they tried to talk Stronach out of many bad decisions, but he seldom paid attention to them.
“You’ve got to listen, right?” Stronach said during a horsemen’s meeting at Santa Anita in April 1999. Unfortunately, he failed to take his own advice over most of the last decade. Now he’s paying the price, but so is the rest of the Thoroughbred industry. No one can be certain where those bad decisions will take us.
Copyright © 2009, The Paulick Report
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Tags: chris mccarron, dennis mills, Frank Stronach, frank's energy drink, gulfstream park, HRTV, Magna, magna bankrupt, magna bankruptcy, Magna Entertainment, magna entertainment bankrupt, magna entertainment bankruptcy, magna international, magna racino, meca, mi developments, mim, Paulick Report, Ray Paulick, santa anita, santa anita park
March 5th, 2009 at 1:23 pm
Ray - a good read as we approach the sunset on this monument to controlling racing in the US.
I’ll say this while the whole entity in the end is a wreck there are elements of his empire building which were very logical at first.
Example, acquiring Gulfstream was fine as a business move in a coast-to-coast single owner concept and he didn’t overpay for Gulfstream. Rather it was the insane changes at nose-bleed inducing costs which killed that golden goose. The track and facilities didn’t need to be reworked but the visionaries who either had his ear or yes men who should’ve asked “why are we doing this” didn’t understand racing. He should’ve been wondering how to maximize the value of the track without attempting to start from scratch by luring in consumers who have never proven to be loyal spenders with horse racing.
The Magna-5, annual Sunshine Millions, creation of HRTV, and other synergies of the various tracks are perfectly fine.
With the MD Jockey Club it too made sense to gobble it up but that wasn’t a single thriving track but multiple tracks in a small geographical area and assorted problems. So Maryland racing was likely an unforeseen complex purchase. The negotiation of the purchase appears to be one of the worst I’ve seen with that glaring bit concerning slots revenue going to the prior owner for years to come. The woes in MD were compounded by the shifting sands of the Mid-Atlantic racing scene which aggressive tracks in WV, PA, and DE have been far more nimble, progressive, and backed with friends in their respective state governments.
Had Magna been far more thrifty, avoided pouring hundreds of millions needlessly in equity (or added to the debt) for unnecessary updates and expansion, put more innovative people in charge to make the tracks money (vs. just spending money) they’d be more like CDI and easily in the black with their balance sheet.
As for the much maligned Frank’s Energy drinks its worth noting that when it was launched (albeit as a Johnny come lately in a crowded field of caffeine drinks) the sales and margins for such beverages ranked among the best of any consumer product. Red Bull and Rock Star are have made massive fortunes selling a simple product like hotcakes regardless of flavor or taste. Like the tracks it just didn’t catch fire on when he jumped in …
March 5th, 2009 at 1:24 pm
The next few weeks should be telling that’s for certain.
March 5th, 2009 at 1:24 pm
Two years ago Mike Pegram was willing to put up his own money to improve Los Al. It would have enlarged our base with a whole new group of thoroughbred racing fans. It was close enough and convenient for split stables.
It was opposed by Drew Coutou of TOC who envisioned a fun track in Indio with a tent .That track would be built by Native American tribes and have gaming. Fans would be comfortable racing in the cool of the evening, and our horses could swelter in the consistent six digit temperatures. Pegram was also opposed by the CHRB who felt, “We gotta help Frank”.
Now, who is going to help us? Will it be the new ” California Alliance” composed of the same people who got us where we are today?
March 5th, 2009 at 1:44 pm
All I can say, is that while Mr. Stronach did some decent things for those tracks and placing a ban on runners to slaughter, this was always a self-absorbed, ego embellishing train wreck waiting to happen. I don’t blame racing so much as the Federal regulatory entities that were supposed to be in charge of protecting the American public. In the long run, we as a Nation suffer as will the horses and those that help them run. Sounds like Bernie Madoff of the horse racing game. Will he lose his beautiful farms and stock…will the share holders be paid? What the hell has happened to the people in charge of making the wheeler, dealers play fair and ethically? Greed and rule abuse playing run amuk. I don’t care if it was here or Canada or EU…schmucks! And who pays the price? The fan, the bettor, the country and in the end…the horses. Absolute schmucks!
I wonder where Mr. Minor is.
March 5th, 2009 at 3:51 pm
It’s crummy. We fix it, make it nice. Yah.
March 5th, 2009 at 4:01 pm
Frank Stronach had a vision to revolutionize the industry, but the plan bogged down almost as soon as it was being implemented. Instead of altering the plan to quickly changing forces (in particular, the numerous political opponents to his various proposals), Stronach forged ahead, playing fast and loose with shareholders, shifting cash around various business entities like a grand shell game and surrounding his castle with dimwits who nodded like bobblehead dolls to any idiotic statement the “Emperor” put forth.
But it will be the “little” people being the losers in the end; tracks like Thistledown in Cleveland, OH, are on the brink of closure, talk remains loud in Maryland that the Preakness will be history and with the reorganization will certainly come layoffs at even the top tracks in his crumbling empire. The “Emperor” has no clothes, but nobody is laughing.
March 5th, 2009 at 4:24 pm
We all saw it coming, but not much can be done now except to try and pick up the pieces and keep most of the tracks operating, hopefully in other, saner hands. The bankruptcy filing contained one last gasp of Frank’s nonchalant way with shareholders: DIP (debtor in possession) financing from MI Developments and a “stalking horse” low-ball bid for the MEC assets from the same company. Frank, at some point a bankruptcy judge, even in notoriously corporate-friendly Delaware, is going to tell you that the shareholders and creditors have some rights too.
March 5th, 2009 at 6:44 pm
I’m not so sure the “stalking horse” bid as proposed is “low ball.” The Villages at Gulfstream Park and the subsequent inherited debt load when the construction financing converts to permanent will be enough to sink anyone’s ship that tops the MID bid. Unless, of course, if retail business and real estate recovers in the near future, thus the shopping center adjacent Gulfstream becomes a success. Highly unlikely. If the “stalking horse” bid really is low and the Villages are a wonderful investment, all someone has to do is top it and they are the winner of the proposed assets that are a part of the bid.
March 5th, 2009 at 9:23 pm
The Roaring Twenties II has ended. And good riddance.
Idle speculation has it that if he had just passed on acquiring Pimlico, he would have avoided the lure of The Sirens on the rocks.
And to those who were responsible for lending the truly obscene amounts of money to this obviously deluded renegade, the consequences of your own financial woes are indeed, richly deserved.
March 5th, 2009 at 9:38 pm
With all due respect to Stronach, who must be a whiz at the auto business and has a great track record with his breeding and racing stable, I can’t see how the company will turn around even with bankruptcy court protection, as long as he is running the show.
Can the bankruptcy court judge insist that someone else runs Magna while it reorganizes?Otherwise it will end up in the same place, and we in California will be that much closer to having no racetracks left.
March 6th, 2009 at 3:09 am
My greatest fear is that the bankruptcy will result in Northern California losing its only remaining track - Golden Gate Fields - to real estate developers. Golden Gate Fields is situated in the city of Albany on the shores of San Francisco Bay with a panoramic view of the SF skyline, Golden Gate Bridge, Alcatraz, Angel Island etc. The mayor and city council of Albany seem excited about the prospect of the demise of the track and the land’s conversion to other uses.
March 6th, 2009 at 9:47 am
In the end, lack of integrity alone has damaged the sport from top to bottom. From breeders who breed for greed, to the owners, who can no longer compete without hiring cheaters, the playing field is so skewed even the gamblers are fed up. And as you can see by MEC’s troubles, if you piss off the gamblers and owners, it’s time to close shop.
We can blame the lack of leadership in the sport, or the lack of nationalized CONCERN for the sport. Drug use and vet magic were allowed to run things, it was supported by the larger operations who were happy to be able to skew the odds. The owners are now leaving in droves, why shouldn’t they? The sport made sure that unless you were using every advantage at your disposal (super-trainers), you had no shot. In a sport where the difference between a paycheck and a loss can be measured in fractions of a second, we not only allowed steroid and drug usage, we honored the best abusers. And in the end, the breed suffered. Even as field size and starts per horse were plummeting, the real issues were always skirted and ducked, for over three decades we let greed rule, corruption spread, and disenfranchisement foster. So sad that in the end, the horse is weaker as a breed, and we lost the beauty of what was.
And THAT, my friend, is what caused the demise. Yes, yes, the economy is bad, but we balanced the golfball on the very edge of the cup with our greed and arrogance, the bad financial situation merely tipped it in. A perfect storm that we failed to plan for. Actually, a perfect storm that we planned to fail for.
The horse, our PRODUCT, is now weak. It’s performance can no longer be trusted. Ownership can no longer offer hope of profit, unless you are wired in, stallions are part of a muddy gene pool and there is nobody who can help us, because for too long we were unwilling to help ourselves. The Product sucks. It goes something like this: You could build me a brand-new 50,000 seat madison square garden, but if I am the only person singing (I suck) trust me, it’s over. It’s not the arena.
They don’t build Yankee Stadiums for kindergarden baseball.
March 6th, 2009 at 10:10 am
Again, I ask…where is Mr. Minor? He said he had a vision, but then again Stronach said the same thing. This business without integrity and fidelity is killing America and the world. Just exactly WHY were these money sucking trolls allowed this freedom and lack of accountability?…because THEY SAID THEY HAD MONEY AND POWER???? …because they could schmooz lenders, who in turn were lying to their shareholders and the Feds? What the hell has happened to this country!?!?
And who looses? The American public, the sport and in the end, the horses. Anyone find it interesting that for the last four years Stronach has been living the “lush life” embellishing his personal holdings while his businesses were engorging, shuffling and delaying debt?
Who in the HELL is in charge?
March 6th, 2009 at 10:24 am
Well, there it is. Some of it is inherent in the European style of doing business, “I lead, you either follow or get out of the way.” I suppose in any other business that many acquisitions in so few years would run up a dozen or so red flags, but racing is a rather convoluted business model on a normal day The regulatory agencies (in this climate, that term is either an oxymoron or a pun — I can’t decide) were far too busy signing off everybody’s retirement options.
Oh — Bay Area news this morning. Golden Gate Fields. You can have it for $195 million. They just stuck the sign in the ground.
March 6th, 2009 at 11:27 am
Somewhere between the second and third cup of coffee, someone’s comment finally upset my stomach worse than normal. Something like, “Maybe this is the catalyst that racing needs to…” yeah, always after the fact. I wonder if Custer was musing at the Little Big Horn about rethinking American policy toward Indian affairs? Geez, pass out the Kleenex.
March 6th, 2009 at 11:56 am
I don’t think racing is entirely to blame. Let’s remember they can’t even come up with uniform licensing and drug rules. When it comes to the money end that id ENTIRELY the government’s responsibility. But if the SEC can’t get Madoff after 8 whistle blower reports, why are we surprised here?
Last night Eric Cantor and Steny Hoyer went one on one about proceedure, and then closed the session with a house resolution to recognize the USC Trojans for their victory in the 2009 Rose Bowl…Geeze Loueeze! This is what these nitwits are involved with????? With country crumbling? I think we have Madoff’s and Stronach’s in charge of our country. And they are the rule makers and keepers. HOLEE CRAP!!!!!!
March 6th, 2009 at 12:59 pm
[...] « MAGNA: HOW DID WE GET HERE? [...]
March 7th, 2009 at 11:59 am
I have hated Stronach since I first heard of him and knew he would destroy every track he purchased. Thankfully, he never got his mitts on NYRA
March 11th, 2009 at 1:46 pm
Hi. Nice! Really caouldn\’t agree more REGARDING \”MAGNA: HOW DID WE GET HERE?\”. I really liked it a lot. Try owning a candy store. Thanks.
April 2nd, 2009 at 2:15 pm
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