Saying he is fed up with what he called the â€œmost unprofessional processâ€ he has ever seen, Internet entrepreneur and Thoroughbred owner Halsey Minor told the Paulick Report he has withdrawn from the bidding for the bankrupt Magna Entertainment (MEC) racetracks.â€œMagna Entertainment was to bankruptcy when dead what Magna Entertainment was to corporate responsibility and governance when alive,â€ he said. Minor said he â€œfinally threw in the towel when they refused to allow me to speak and partner with one of Americaâ€™s most profitable and respected gaming companies for the purpose of getting the value of my offer higher. â€¦ The shifting assortment of people â€˜runningâ€™ the bankruptcy denied my right without ever feeling the need to even articulate a reason.â€
Minorâ€™s decision came the same week U.S. bankruptcy court Judge Mary Walrath approved a request by the committee of unsecured creditors to include Magna chairman Frank Stronach and certain directors of the MEC in a lawsuit against Magnaâ€™s parent company, MI Developments, for allegedly preventing MEC from selling off some of its assets to avoid bankruptcy. The company filed for chapter 11 bankruptcy March 5.
The suit, filed July 21, said in its preliminary statement that â€œthe MEC bankruptcy did not need to happenâ€ if the company had sold some of its assets and raised equity. â€œRather,â€ the suit states, â€œthe MID Defendant, MID members of MEC's Board of Directors, MEC management and Tom Hodgson worked together to make sure that asset sales were limited and that key properties –properties that MEC told the world would be sold to the highest bidder–were in fact set aside for MID and its controlling shareholder, Frank Stronach. MID, MEC management, Stronach, and those working with them stubbornly refused to sell MEC's marketable assets, even after repeatedly telling the investing public in SEC filings and on investor conference calls that they would; and even after they knew that their refusal to act could violate their fiduciary duties. Instead of marketing MEC's assets in good faith, Stronach and MID (which Stronach controls), larded MEC with purported loans (secured no less) to keep the failing MEC temporarily afloat, thereby ensuring that the MID Defendant would leapfrog ahead of the pre-existing unsecured debt (including $225 millon in unsecured bonds issued in 2002 and 2003) in an effort to protect MID's equity ownership over MEC's assets.â€
Stronach, the suit alleges, â€œused his control of MID to set up a â€˜heads I win, tails you loseâ€™ financing model.â€ If MECâ€™s performance improved, MID and its shareholders stood to profit, the suit says. If MEC were forced into bankruptcy, MID would use credit bids to retain the most coveted racetrack assets.
Click here for a copy of the unsecured creditors lawsuit, which outlines the history of Magna Entertainment and comments on much of the corporate, financial and governance intrigue behind the failed company.
In a proposal made last fall, Minor offered to buy MID's bridge loans to Magna. He made a similarÂ offer in AprilÂ after Magna filed for bankruptcy. Minor said he was partnering on the proposal with California supermarket mogul Ron Burkle
â€œHe is one of the five most influential people in Los Angeles,â€ Minor said of Burkle. â€œHeâ€™s an extraordinary investor with a sterling reputation, and heâ€™s plugged in to the Hollywood crowd, something racing could use.
â€œAfter we submitted our offer I sent an email to MID asking if we could talk with this major casino company,â€ Minor continued. â€œI donâ€™t want to name them, but they are extremely profitable and were interested.â€ Minor said he got an answer saying the offer would not be presented to the MID board because of the new issue involving a casino company.
â€œItâ€™s so irrational,â€ Minor said. â€œThey donâ€™t even have a reason. Theyâ€™re violating their duty, which is to get the maximum amount of money. When these guys are holding me back from doing that, when I have the strongest offer, itâ€™s unconscionable. Iâ€™ve pursued this for a long time and spent a lot of money, but there is a limit as to how far someone will go to try and buy a business.â€
Minor also accused Magnaâ€™s interim chief executive officer, Greg Rayburn (who served as chief restructuring officer for WorldCom during what then was the largest bankruptcy in U.S. history), of having a duel role as an adviser to MI Developments, giving him an â€œutter and complete conflict of interest.â€
Because numbers at Magna tracks are â€œfalling off the cliff,â€ Minor said, the companyâ€™s earnings before interest, taxes, depreciation and amortization (EBIDTA) has â€œabsolutely nosedived.â€ He said Santa Anitaâ€™s EBITDA will have gone from $22 million to $8 million next year. As a result, he said, the track properties have dramatically fallen in value. â€œThere are sub-$100-million bids for Santa Anita,â€ Minor said. Stronach paid $126 million for the Arcadia, Calif., track in 1998.
â€œThe bids (for some Magna tracks) will be so bad that MID is going to have to credit bid, use their $400 million in debt to go in and buy back the assets, so the track will come back into the same parent company that bankrupted them in the first place,â€ he said. â€œThat will trigger (investment fund) Greenlight and others to have a conniption because MID will not just lend the money but own the assets outright. There are bidders, but thereâ€™s no one to say â€˜I will pay more.â€™
â€œI told (MID chief executive) Dennis Mills last year Magna was going bankrupt, and he said I was completely wrong, didnâ€™t know what I was talking about, was a bomb thrower. I told Frank (Stronach) that if he went forward with the 363 process (stalking horse bid) and the unsecured creditors got nothing, they would sue him corporately and personally. Iâ€™ve told him the money will be tied up in escrow as litigation drags on for years, and said I believe from the work Iâ€™ve done that he will lose. The banks will get paid, the unsecureds will get paid, and whatâ€™s left will come to him after two years.
â€œAll Iâ€™ve asked is, â€˜Can I put something together with each of the parties that prevents going down the path of two years of litigation?â€™ But the basic answer is â€˜no.â€™
â€œI said a year ago I wanted to prevent an ugly, destructive bankruptcy. We are about to see one hell of a an ugly and destructive bankruptcy. Who knows where these assets will end up? We wonâ€™t even know when they are sold who the beneficiary is.
â€œThere will be more lawsuits coming. Frank is not going to let Gulfstream Park be sold for $20 million. So he will buy it back into MID, then what do you think is going to happen? Itâ€™s just starting, and itâ€™s like the company itself: it just gets worse and worse and worse.â€
Minor said he is stunned that Stronach is considered a front-runner to acquire the German automobile company Opel from General Motors.
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