Monday, October 06, 2008

Magna: Slots or Bust

Magna Entertainment Corporation, owner of Laurel Park and Pimlico Race Course, is on the verge of bankruptcy. That fact drives its desperate push for slots at its two Maryland race tracks and makes the state’s gambling referendum even riskier than is commonly believed.

Magna, founded in 1998 and based in Aurora, Ontario, owns horsetracks in California, Florida, Maryland, Ohio, Oklahoma, Oregon, Texas, and Ebreichsdorf, Austria. It also operates a track in Pennsylvania on behalf of a third party. Over its formative period of 1998-2002, the company acquired its tracks through aggressively leveraged purchases – in other words, massive debt. A key part of its strategy was to make the properties more profitable through lobbying for gambling.

Magna succeeded in getting the State of Oklahoma to pass a slots referendum in November 2004. The number of slot machines allowed at Magna’s Remington Park started at 650 and rose in steps to 750. In March 2005, Broward County, Florida passed a referendum allowing slot machines at Magna’s Gulfstream Park. But the referendum is now tied up in court over whether its supporters gathered enough signatures to warrant placement on the ballot. And of course, Magna is a major supporter of the Maryland referendum that would allow slots at its tracks.

Data from Magna’s latest annual report suggests that failure to pass the Maryland referendum may break the back of the company. In the eleven fiscal years the company has been in existence, it has only earned positive net income in two ($441,000 in 2000 and $13.5 million in 2001). Over the last three years, Magna lost $105 million (2005), $87 million (2006) and $114 million (2007), the latter being the worst year in the company’s history. While the firm’s racing properties come somewhat close to breaking even on operating income (losing just $17 million before income, taxes, depreciation and amortization in 2007), the company’s $50 million+ annual interest payments swamp its performance. Why are Magna’s interest payments so high? Because as of 6/30/08, it was carrying $867 million in total debt, of which $396 million was in current liabilities.

Magna needs cash now, a fact the company acknowledged when it laid out its “Plan for Debt Elimination.” The plan involves a combination of asset sales and equity issuances, the latter of course requiring some new revenue source to justify them. But as of earlier this year, the plan was going very badly. The company admitted the following in this year’s annual report:

Although we continue to implement our Plan, real estate and credit markets have continued to demonstrate weakness in the first part of 2008. This has reduced the likelihood that we will be able to complete asset sales at acceptable prices as quickly as originally contemplated. In light of these adverse developments, combined with our upcoming debt maturities and operational funding requirements, we will likely need to seek extensions or additional funds in the short-term from one or more possible sources. The availability of such extensions or additional funds from existing lenders, including MID [their controlling shareholder], or from other sources is not assured and, if available, the terms thereof are not determinable at this time. We expect that we will enter into negotiations with such existing lenders, including MID, with a view to extending, restructuring or refinancing such facilities. There is no assurance that such negotiations, if any, will result in a favorable outcome for MEC [Magna Entertainment]. If we are unable to repay our obligations when due, other current and long-term debt will also become due on demand as a result of cross-default provisions within loan agreements, unless we are able to obtain waivers or extensions. Unless we are successful in our efforts, we could be required to liquidate assets in the fastest manner possible to raise funds, seek protection from our creditors in one or more ways or be unable to continue as a going concern. [Bold added]
Those words were written in March, long before the credit crisis fell into its current abyss. And now things are much, much worse for Magna. The company recently announced that it had to renegotiate its credit arrangements after paying $900,000 in fees to its lenders. Investors understand the company’s instability: Magna’s stock value has fallen from nearly $60 a share a year ago to less than $2 today.

At the moment, Magna’s financial problems are so severe that it could conceivably fail prior to the installation of any slot machines in Maryland even if the referendum is passed.

Is this the sort of firm to whom the Free State should be entrusting its financial future?

Disclosure: The author has been a corporate researcher in the labor movement since 1994.