The recent press release announcing Magna Developments (MIM) was scrapping its reorganization plan to help debt-ridden racetrack company Magna Entertainment (MEC) has prompted one of Magna Developments' largest institutional investors to warn the real estate entity's board of directors that it was prepared to “vigorously protect” its rights as a shareholder if the board “does not fulfill its fiduciary duties in the weeks ahead.”
Farallon Capital Management, which in October called Magna Entertainment a “financial sinkhole,” filed a letter with the Securities and Exchange Commission on Tuesday that called for the Magna Developments board to foreclose on loans made to the racetrack company if they are not repaid on the accelerated March 20 due date. Half of Magna Entertainment's $600 million in debt is owed to Magna Developments, and the racetrack company has lost $500 million over the last five years, according to the Farallon letter. Farallon owns 5.5% of the company's Class A shares. Click here for the Farallon letter to the Magna Developments board.
“Given the (MIM) board's history of failing to defend MIM's contractual rights against MEC, we are greatly troubled by the press release's silence on whether MIM will enforce MEC's debt obligations when they come due,” the letter states. “Bankruptcy would allow MIM to realize at least some value on its loans to MEC.”
The Farallon letter calls it “folly” that current market conditions justify providing additional financing to Magna Entertainment. “There is no realistic prospect that MEC will ever be financially viable,” it states. “That the (MIM) board has authorized over $300 million in loans in a failed attempt to prop up this equity only highlights the foolishness of the two companies entanglement. There is no possible justification for MIM to deepen that entanglement by lending more money to, or accepting equity in, MEC.”
Frank Stronach is chairman of both Magna Developments and Magna Entertainment.
“If MEC fails to repay the loans as scheduled, MIM should not waste a single day waiting to exercise its rights as a creditor,” the letter states. “Any other course of action would be a dereliction by the (MIM) board of its fiduciary duties. Farallon is watching the board closely. We are prepared to vigorously protect our rights as a shareholder if the board does not fulfill its fiduciary duties in the weeks ahead.”
The Farallon letter comes two weeks after another unhappy institutional shareholder, Greenlight Capital, wrote to the Magna Developments board saying they will be held responsible for any failure to live up to their fiduciary duties. Click here for that letter.
More bad news for Magna: just last week, Jerry Campbell, a former CEO of Magna Entertainment, resigned from the MEC board.
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