Knobias Clip Report (9-13-2007)

Submitted from Knobias ClipReport


MECA: Announces Reorganization; Tries to Get on the Right Track

Horse racing usually grabs the attention of most Americans three times a year for a total period of 6.5 minutes which is the combined time it takes for the horses to run the three legs of the Triple Crown. For the more equestrian enthused, the Breeders’ Cup has begun to supplement their hankering for racing. For the racing fanatics, multiple races, leagues, and variations in the lengths of races have emerged to meet the demands of fans and gamblers alike.

The fact remains, though, that the industry has become increasingly ludicrous with the amount of money associated with the sport. Everything from stud fees to horses winnings have exploded over the past few years. Also increasing is the amount of betting on the races. Pari-mutuel betting has become a big business especially in the state of New York. That state government is currently debating what to do with its ailing thoroughbred horse racing franchise and if to allow Gov. Spitzer’s recommendations on its administration and oversight.

Much like the state of New York’s horse racing and gambling business, Magna Entertainment Corp (MECA) is attempting to restructure it business to minimize losses and attempt to become profitable once again.

Following the report of their second quarter earnings on August 9th, the Company noted some drastic changes would be implemented to maximize shareholder value. The Company engaged Greenbrook Capital Partners Inc. to conduct a strategic review and also noted that they would cease racing operations at their Austrian racetrack, Magna Racino, at the end of its 2007 meet, relinquish their racing license for Michigan Downs, and terminate their racetrack development project in Dixon, California.

The Company announced during Thursday’s session the results of the strategic review. The plan called for adopting a strategy which would eliminate the Company’s debt by December of 2008 through the divesture of assets that were expected to generate $600-$700 million. It was also noted that the Company would enter into strategic transaction involving their racing, gaming, and technology operations along with a possible equity issuance, likely in 2008.

To help fund the Company through its execution of the plan to become debt free, the Company announced a total of $100 million in financing consisting of a $20 million PIPE with Fair Enterprise Limited (a company that forms a part of the estate planning vehicle of Frank Stronach, MEC’s Chairman and CEO), and an $80 million short term bridge loan from a subsidiary of MI Developments Inc. (MIM), which Frank Stronach serves as Chairman of the Board. Also of note was the strategic review done by Greenbrook Capital Partners is owned by MECA’s ex-CEO and president, Tom Hodgson.

In the press release announcing Hodgson’s departure in March of 2006, Stronach stated, "Tom Hodgson, our current President and CEO, joined MEC in early 2005 to develop and implement the Company's recapitalization plan which was announced in July 2005. Under his leadership, the recapitalization plan has progressed well. The Board has decided that, going forward, MEC should seek a CEO with in-depth knowledge and experience in the horseracing and gaming industry who can lead the Company in fully exploiting its opportunities in this sector."

Reading between the lines in a speculative nature, it seems that Hodgson was in the process of recapitalizing and reorganizing the Company, was interrupted by the Board and possibly more so by Stronach, who was then appointed interim CEO, and now needs Hodgson’s help again in reorganizing the Company and has put up his own money to pay for his mistake. Again, this is purely speculative and just one reader’s take on the news but could be right on the money considering Stronach's multiple changing of CEO's in his companies.

In any event, it seems some mistakes were made and the overall horse racing/gambling market hasn’t grown to the extent to what the Company originally thought. If they are successful in shedding their debt, it could save the Company some $60 million in interest expense which was how much the Company paid in fiscal year 2006, but top line numbers will obviously take a hit following disposal of revenue producing assets. The trade off seems necessary to become cash flow positive. Either way, shares gained 20% on 800,000 shares traded, and with that kind of following and movement, someone feels the Company could be on the right track. Investors would be wise to watch.



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