News

Frank Stronach's vision of transforming the Sport of Kings ground to a halt Thursday when his debt-hobbled race track and gambling company, Magna Entertainment Corp. (MEC), filed for Chapter 11 bankruptcy protection.

The move puts at least a temporary stop to a 10-year adventure that Mr. Stronach has described as a labour of love.

It has involved the purchase of some of the most storied race tracks in North America along with grandiose plans to turn them into entertainment and shopping hubs to revitalize the declining racing industry.

All of MEC's assets are on the block, but there will be not be a fire sale, said Dennis Mills, chief executive officer of MEC's parent company, MI Developments Inc.

The real estate company, which owns 59 per cent of MEC, will take possession of three tracks and some other assets.

If any bids for those assets are insufficient, MI will hang on to them, which means Mr. Stronach may end up remaining in the racing game at the end of the restructuring, through his control of that company.

The immediate trigger to the Chapter 11 filing was a requirement to repay about $38-million (U.S.), due Thursday to Bank of Montreal, and the looming prospect of another $175-million due to MI in two weeks.

Payment of those debts was accelerated last month after the collapse of a deal that would have severed MEC from MI Developments, and ultimately would have transferred complete control of MEC to Mr. Stronach.

That deal was a casualty of the credit crunch.

But even before it collapsed, MEC's plan to refinance itself outside bankruptcy protection by selling off excess land fell apart with the crash of the U.S. real estate market.

Perhaps the most critical problem Mr. Stronach was unable to solve, however, was the structural decline of horse racing as Americans gambled tens of billions of dollars in lotteries, slot parlours and dozens of casinos that sprang up outside the traditional gambling centres of Las Vegas and Atlantic City, N.J.

His vision started with the purchase of Santa Anita Park near Los Angeles in 1998 and eventually encompassed tracks in Florida, Maryland, Texas, Oklahoma, Pennsylvania, Oregon, Michigan and Ohio.

It came into sharpest focus at Gulfstream Park in Florida, where Mr. Stronach tore down a grandstand built in 1939 and erected a smaller clubhouse with several slot parlours and a high-end shopping and restaurant concourse that is scheduled to open later this year.

Mr. Stronach once said the combination of racetracks and Internet and off-track betting associated with them could lead to a company even bigger than Magna International Inc., the auto parts giant he founded in a Toronto garage in 1957. It rang up sales of about $24-billion last year.

Mr. Stronach is chairman of all three companies and has been acting chief executive officer of MEC for more than a year.

In an interview last spring, he acknowledged the company had made mistakes – one of which was expanding too quickly and taking on too much debt – but that he was confident his dream was close to being realized.

Instead, in the dry words of a legal filing Thursday by the company's general counsel, William Ford, in a U.S. bankruptcy court: “MEC's highly leveraged capital structure has hindered its ability to improve operations and has led MEC to determine that it must undergo a financial restructuring to address its overly leveraged balance sheet.”

The debt amounted to $617-million as of Sept. 30, 2008, but the picture darkened during the fourth quarter, when the recession helped drive MEC to a full-year loss of $294.1-million on top of losses of more than $400-million in the previous three years.

MI, which has been under fire from its shareholders for financing MEC, will provide what is known as debtor-in-possession (DIP) financing of $62.5-million, which will allow the tracks to keep operating while the company restructures.

“The terms of the DIP financing contemplate that MEC will sell its assets through an auction process and use the proceeds from the asset sales to repay its creditors,” MEC said in a statement.

MI will take possession of Gulfstream, Golden Gate Fields in San Francisco and a track in Dallas at a total value of $195-million in the form of cash, a lease and forgiveness of some debt payable by MEC.

That represents what is known as a stalking-horse bid, so if a buyer offers more money, the properties will be sold.

A logical buyer for some of the assets is publicly traded Churchill Downs Inc., which owns the track of the same name in Kentucky and plays host to the Kentucky Derby, the first jewel in thoroughbred's Triple Crown and probably the most well-known event in racing.

While Mr. Stronach was unable to rejuvenate racing, the industry needs to be shaken up, said Doug Reed, director of the Race Track Industry Program at the University of Arizona in Tucson.

“What I think has to happen is some kind of epic change and this may be the catalyst to do it,” Prof. Reed said Thursday.

“It's not going to be pretty but the industry is fragmented and they can't kind of come up with a plan among themselves so, therefore, [it will be] the survival of the fittest.”