View From The Eighth Pole: The Irrational Exuberance Of Ahmed Zayat

by | 02.03.2020 | 6:06pm
Ahmed Zayat with American Pharoah after his homebred colt won the 2015 Breeders' Cup Classic

For many, a horse racing stable is a business. As most Thoroughbred owners know, however, it's not a business that anyone should count on being profitable.

A quick look at the math:

In 2018, according to The Jockey Club Fact Book, 46,144 starters competed for about $1.1 billion in purses. The average earnings per starter was $24,223.

It costs anywhere between $35,000 and $50,000 to keep a horse in training annually. If the average training costs are $42,500 annually, that's an outlay of almost $2 billion in training costs.

By my calculation, that's an annual loss of about $900 million to Thoroughbred owners.

This does not include acquisition costs (breeding or buying Thoroughbreds) or the residual value for those horses good enough to enter the breeding shed at the end of their racing careers. It also does not include the tax benefits that many Thoroughbred owners may realize.

Some individuals or organizations have put together disciplined, long-term business plans or models for a racing stable that work from a profit and loss standpoint, but those are the exception to the rule. The principal reason most people get into horse ownership, either individually or as members of a partnership, is the experience, the love of the game or the horses or both. It's not to make money.

It's against this backdrop, this steep uphill climb for a racing stable to be profitable, that I marvel at the exuberance (dare I call it irrational) demonstrated by Eclipse Award-winning owner Ahmed Zayat of Zayat Stables.

The stable has been in the news lately for all the wrong reasons. It's been sued for $23 million by the New York-based MGG Investment Group, which alleged Zayat defaulted on a loan. At MGG Investment Group's request, the stable was put into receivership by a judge in Kentucky. It's been sued by trainer Mike Maker, who said Zayat Stables fell behind on training bills. Last fall, a different trainer, Rudy Rodriguez, scheduled a “foreclosure sale” in New York on two Zayat horses after claiming the stable owed him more than $600,000 in unpaid bills. That issue was settled.

For his part, Ahmed Zayat may believe he is just one or two big horses away from being whole, and his hope is to find investors or lenders to support his stable in the near term until it finds firm footing. Who can blame him? Since forming Zayat Stables in 2005, the New Jersey resident built a notable track record for developing stallion prospects, led by Triple Crown winner American Pharoah but also including Pioneerof the Nile, Bodemeister, Zensational, Eskendereya and Paynter.

But Zayat also has been highly leveraged along the way, something that might work for a traditional business with a predictable cash flow. A racing stable is neither traditional nor predictable.

In December 2009, Zayat was sued by Fifth Third Bank for allegedly defaulting on $34 million in equine loans. The stable subsequently filed for Chapter 11 bankruptcy protection and eventually worked out a settlement agreement that called for all debt to be satisfied by Dec. 31, 2014.

The timing of American Pharoah's ascension as the champion 2-year-old of 2014 was fortuitous. According to the MGG Investment Group lawsuit, Zayat Stables sold 100% of American Pharoah's stallion shares on Jan. 16, 2015 – just after his obligation to Fifth Third Bank was due – to an affiliate of Coolmore. The stable would eventually receive a total of $23 million for the Pioneerof the Nile colt, according to the MGG complaint (presumably the sale contract included “kickers” for Grade 1 wins that increased the initial offer to that final price). The sale was announced after American Pharoah had won the Preakness Stakes, the third of six G1 races the eventual Horse of the Year won as a 3-year-old.

Zayat Stables, which earned just over $10 million in purses in 2015, went on a buying spree  that same year, spending more than $10 million on 40 weanlings, yearlings and 2-year-olds at U.S. and European bloodstock auctions, according to Bloodhorse.com data.

In 2016, Zayat Stables spent over $9 million at the sales to acquire 39 racing prospects, but without American Pharoah stable earnings plummeted to $2.2 million. That might sound like a lot, but consider that it costs at least that much to keep 50 horses in training over the span of a year.

By July 2016, Zayat was looking to raise funds to support and expand his stable. A private “investment opportunity” made through Piper Jaffray investment bank tried to raise $300 million to grow Zayat Stables and open a new line of business – a national veterinary services company.

“The company has a successful racing and breeding business model that breaks traditional industry norms (in which horses are often viewed as 'hobby' investments) and takes a sophisticated, analytical approach to horse selection,” the brochure stated.  “The equine market is fragmented with no major players – most participants are unsophisticated using traditional methods with very little innovation or use of advanced analytics.”

There were no takers.

By the end of July 2016, Zayat had signed a deal with MGG loaning him $25 million – of which $10.8 million went to refinance existing debt, $4.5 million was for existing accounts payable and $7 million could be spent on new bloodstock acquisitions.

In 2017, Zayat Stable's investment in racing prospects slowed; only $2,605,200 was spent on nine purchases. The year's stable earnings of $2,383,096 – coming after 79 prospects had been purchased the previous two years – was not a significant jump from 2016.

In 2018, the stable purchased 19 horses at public auction for $5,247,000, but purse earnings barely topped $2 million. Earnings declined further to $1,418,402 in 2019. There were no purchases in 2019, according to Bloodhorse.com.

Despite spending nearly $27 million at public auction on 107 horses over four years, from 2015-18, Zayat Stables' last Grade 1 win was American Pharoah in the 2015 Breeders' Cup Classic at Keeneland. It's registered just one graded stakes win since then, that coming with Irish-bred 5-year-old Desert Stone in the G2 San Gabriel on the Santa Anita turf last month.

Collateral for the loan from MGG included nine lifetime breeding rights in American Pharoah, which were originally owned in the name of Zayat's wife and children. At the time of the loan, one of the requirements was that the breeding rights be transferred from those individuals to Zayat Stables. Beginning in December 2018 and continuing until June 2019, the lawsuit contends, the nine breeding rights were sold without the lender's knowledge – by Zayat's wife and children, who had previously signed them over to the stable.

The MGG lawsuit called this a “fraudulent scheme” in violation of the loan agreement because the breeding rights were part of what was used to secure the loan.

MGG claims that Zayat Stables went into payment default Sept. 30, 2019, and things came to a head just over three months later when MGG filed suit in Fayette Circuit Court in Kentucky.

One of the exhibits attached to the lawsuit is a six-page email dated Jan. 13, 2020, from Ahmed Zayat to Devin Griffin, the founder of MGG and the company's chief executive officer. In it, Zayat claims he had recently been in Shanghai, China, giving presentations to potential investors he hoped would be “a lifeline for a cash injection into (Zayat Stables) that will not only make the company fiscally functional but also will get you whole and my other lender Cedarview.” (Zayat said he had paid over $1 million in interest in 2019 to Cedarview Capital, a New York hedge fund.)

In fact, Zayat said, he had been casting his net around the world.

“I employed every single investment bank that would talk to me and have given over 100 presentations to private equity firms, hedge funds, alternative assets lenders, family offices. Locally and internationally,” he wrote.

Zayat referenced Morgan Stanley, Consilium Capital, Piper Jaffray, Keith Harris and Associates, FocalPoint, Marc Howland, Janney Montgomery and Inner Circle as among those he had pitched for financial support.

“There has not been a stone unturned,” Zayat's email states.

“I have used every trick in the book to find money / Borrow money,” he added. “Just so I can operate Zayat Stables and float it for the last 15 months to allow myself the chance to get a partner that would make my company financially stronger….

“I don't know what's next, but I know I am committed to helping maneuver this company through this crisis by monetizing and selling the remaining assets to get you whole,” said Zayat. “In the interim, there is still a glimpse of light that a miracle can happen, that an investor or a firm will come and fund this company.”

Ahmed Zayat is much smarter than me in business. He made a small fortune with a beverage company he built and later sold in his native Egypt. I have seen many other people like him – highly successful in business and industry – come into Thoroughbred racing, thinking they can outsmart the other guy, that they had discovered the key to success. I've seen many of those same people leave the game after taking a beating financially.

This is a tough game with a million ways to lose a horse race and only one way to win. It's not a game for those faint of heart or thin in the pocketbook. A racing stable may be a business, but only a select few can call it a business that consistently turns a substantial profit. There's a reason it's called the sport of kings.

That's my view from the eighth pole.

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