Frank Stronach laid down a wager yesterday on his distressed racetrack and gambling venture, betting that taking control of it himself will eventually lead to a payoff.
Mr. Stronach pulled the trigger on a complex three-way deal that will see MI Developments Inc. shed its money-losing racetrack and gambling assets.
The move could broker a peace with some investors in MI Developments, which is the real estate arm of the Stronach empire, after a two-year battle to divest the horse racetrack assets, which are held in Magna Entertainment Corp. (MEC) and have lost more than half a billion dollars since 2003.
But the refinancing package failed to silence the most vocal critic among shareholders of MI Developments and a key clause in the deal raised concerns about Mr. Stronach's auto parts firm Magna International Inc. gaining more exposure to real estate and horse racing.
Frank Stronach, chairman of Magna International Inc. during the company's annual general meeting in 2007. (Fred Lum/The Globe and Mail)
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Mr. Stronach will pay $25-million (U.S.) to take a controlling 59-per-cent stake in Magna Entertainment from MI Developments, which will then become a pure real estate company.
MI Developments will transfer $150-million in cash, $247-million in debt owed to it by MEC and real estate in Aurora, Ont., to a company controlled by Mr. Stronach that will hold the MEC stake.
The 75-year-old magnate is chairman of and controls those two companies as well as Magna International, which would be increasing its exposure to non-core assets after spinning off its interests in the two companies in 2003. The role for cash-rich Magna is to guarantee a $1-billion loan to a new real estate company that will replace MI Developments as the landlord for many of the auto parts giant's factories around the world.
The deal appears to be an indirect method of using cash-rich Magna to help finance money-losing MEC, said one source familiar with the history of Mr. Stronach's investments in racetracks, which goes back to 1999 when Magna bought Santa Anita Park near Los Angeles. “If Magna's guaranteeing a $1-billion credit facility, it's using its balance sheet,” the source said.
The transaction also raised eyebrows at Toronto-based credit-rating agency DBRS Ltd.
“We're nervous about putting a potential additional $1-billion debt on Magna's balance sheet,” said Kam Hon, managing director of industrials for DBRS.
The proposal comes as MEC tries to reduce debt and raise money by selling off excess real estate and some racetracks in the midst of a massive downturn in the U.S. real estate market, where all but one of its tracks are located. MEC has lost $507-million since 2003.
At the same time, Mr. Stronach and MI Developments are under renewed pressure from that company's largest shareholder, New York-based hedge fund Greenlight Capital Inc., which condemned the transaction.
“Mr. Stronach and MI Developments have effectively put a gun to the head of the company's shareholders and convinced a majority to support an outrageous multi-hundred-million-dollar payoff,” said David Einhorn, president of Greenlight.
The company said holders of more than 50 per cent of the class A subordinate voting shares have indicated support for the plan, which is subject to approval by two-thirds of them and by Magna's board of directors.
A Greenlight lawsuit against Mr. Stronach and MI Developments accusing them of oppression of shareholder rights, will go to an Ontario Court of Appeal panel this month.
Greenlight renewed its efforts to get MI Developments to cut MEC loose with a proposal for consideration at the real estate company's annual meeting that would limit support for MEC to short-term financing. “We vehemently object to the proposed transaction,” Mr. Einhorn said.
The new real estate company “would be prohibited from entering into any future transactions with MEC or the limited partnership without the unanimous consent” of the new company's board of directors, MI Developments said in a statement.
Bank of Montreal and UBS Securities LLC, which provided a letter saying they're confident they can arrange a credit facility for the new company, said they assume “the business and operations of Magna Entertainment Corp. will be ‘ring-fenced' ” from the operations of the new company.
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