MR. STRONACH STRIKES ANEW

Frank Stronach’s persistence in the face of adversity exemplifies what separates the most successful entrepreneurs from the pack.   In the wake of the bankruptcy of Magna Entertainment Corporation–when the assets have not yet been disposed of–Mr. Stronach is again playing a high-stakes game.   As chairman of Magna International, the Canadian automobile parts manufacturer that he started in a garage, he is poised to buy Opel from General Motors.   The Wall Street Journal (“Magna May Snag Opel”) of May 30-31, 2009, says:   “Grabbing Opel would give Mr. Stronach a victory to offset a recent defeat.   In March, Magna Entertainment filed for bankruptcy protection and now is trying to sell many of its tracks.”  

In Magna International’s first attempt to acquire an automobile company, it was the losing bidder to Cereberus Capital Management for Chrysler.   That turned out to be a case of being grateful that you did not get what you wished for.  Whew!

The tentative agreement would give Magna a 20 percent position in Opel.  Sherbank, the largest Russian state-controlled bank, would have 35 percent.   General Motors would retain 35 percent and Opel employees would get 10 percent.   The German government would provide (ostensibly) short-term financing of the euro equivalent of over $2 billion.

If Magna were to get Opel, the future would be fraught with risk.   Anytime a company engages in vertical integration it increases its vulnerabilities.   A good example, among many, is when PepsiCo got into the restaurant business by purchasing Taco Bell, Kentucky Fried Chicken, and Pizza Hut.   The theory behind the acquisitions was that the thousands of franchisees and company-owned outlets would be locked into using Pepsi soft drinks.   Trouble was, the deal put Pepsi in competition with its own customers, such as Wendy’s.   The late Dave Thomas, Wendy’s founder, was irate and kicked Pepsi out of his restaurants and replaced them with Coke.   Eventually, Pepsi divested itself of the restaurants, which are known today as Yum Brands, the world’s largest restaurant company and, coincidentally, sponsor of the Kentucky Derby.

Magna would be following the same treacherous path because its Opel brand would be competing with car companies that buy parts from Magna International.   Some of them may  be offended and/or  may not want to share plans for future car models with a parts manufacturer that happens to own Opel.

The Wall Street Journal opines that Magna faces the challenge of having the “marketing savvy” to compete in the retail automobile market.   Does this sound familiar?   The same concern was there when Mr. Stronach got into the retail horse-racing business.

Mr. Stronach could rest on his reputation and wealth from a long and distinguished business career.   But like most other high-rolling entrepreneurs, he won’t, or can’t.   Think about the audacity of the Opel venture.   A Toronto business tycoon in his seventies is the chairman of an auto parts manufacturer that is reeling from the depression in the North American car business.   He recently was forced to take another business, Magna Entertainment, into bankruptcy.   Now, instead of waiting out the storm, he is partnering with a Russian bank, far from Toronto geographically and culturally, to buy an automobile brand from a company, General Motors, that is on the verge of collapse and is a ward of the U. S. taxpayer.

I have spent my adult life around entrepreneurs who take the risks that keep the economy going and provide jobs for everyone else.   Mr. Stronach is as bold of an entrepreneur as they come and I admire him for it.

Although I have doubts about some aspects of the strategy behind his Opel venture, he has a reasonable shot of succeeding.   His background in automobile parts manufacturing provides him with far more expertise in running a retail business pertaining to horsepower of the mechanical genre than it did a retail business centered on equine horsepower.

Copyright © 2009 Horse Racing Business

BOOK REVIEW OF “KEENELAND’S TED BASSETT”

Keeneland’s Ted Bassett – My Life
by James E. “Ted” Bassett and Bill Mooney
The University Press of Kentucky 2009, 406 pages

Even though Ted Bassett’s father worked for the famous Greentree Farm and Stud, owned by a branch of the Whitney family, and was a vice president and director of the Keeneland Association in its early years, Ted himself did not grow up in the horse-racing business, as he was away from his Bluegrass home for much of his youth.   Mr. Bassett was sent to boarding school in Connecticut at age 12 and then went to college at Yale.   After graduation, he served as a combat officer in the U. S. Marines during World War II.   Immediately following the war, he worked for the Great Northern Paper Company in Maine and New York City.   When Mr. Bassett and his wife, Lucy, finally decided to relocate to their native Kentucky, he did not become employed in the racing industry right away, albeit his wife’s family owned and raised Thoroughbreds in Woodford County.   Mr. Bassett became a racing executive when he was in his mid-forties, and his exemplary career lasted about four decades.

Prior to his going to Keeneland as an assistant to the president, Mr. Bassett served as Director of the Kentucky State Police.   In 1967, he commanded the force when they were called upon, in conjunction with the Kentucky Army National Guard, to make sure that the Kentucky Derby was not disrupted by civil rights protestors.

For people interested in the intricacies and challenges of the business side of horse racing, this book is full of examples and observations having to do with a variety of important racing enterprises.   Mr. Bassett was not an entrepreneur, but rather, was an implementor of ideas.  For instance, he played a key role in bringing the late John Gaines’ Breeders’ Cup concept to fruition.   Mr. Bassett was a leader and an executive par excellence with the Keeneland Association, the Breeders’ Cup, the Thoroughbred Racing Associations, Equibase, and the World Series Racing Championship.   This vantage point allows him to provide an insider’s views of his dealings with people ranging from royalty, sheikhs, and the director of the FBI, to blue-collar folks who worked at Keeneland.

However, this book is not a dry treatise on administering a racetrack, a sales company, and other racing-related ventures.   Mr. Bassett and Mr. Mooney inform the reader about Mr. Bassett’s years in boarding school, in college, during World War II, and so on through his life, with appealing and often self-effacing anecdotes.   For example, Mr. Bassett amusingly tells of the time that he reported his car as stolen, only to find out that it was not.   Shortly thereafter, he was stopped in his car by a Kentucky State Police officer because he forgot to rescind his earlier report.  This was an embarrassment, to say the least, for the former commander of the state police.   In another incident in England, Mr. Bassett dropped a trophy on his toe that he was presenting to a winning owner.   Adding to his chagrin, Queen Elizabeth II was looking on.   This faux pas turned out to be a blessing in disguise as it may have saved Mr. Bassett’s life.   The vignette recounts the fortuitous ending.

How Mr. Bassett and others raised the money to prevent the Calumet Farm trophies from being auctioned off in a bankruptcy proceeding is edifying.   Some of Mr. Bassett’s other fund-raising endeavors focus on non-racing institutions in central Kentucky and therefore may not be of interest to people outside that region.

Mr. Bassett candidly assesses the economics of horse racing today in the era of simulcasting, off-track wagering, slot machines, and intense competition for the entertainment and gaming dollar.   He discusses how his thinking has evolved on the issue of slot machines at racetracks.

Ted Bassett typifies what Tom Brokaw called “The Greatest Generation,” Americans whose attitudes and approaches to living were shaped as children and young adults in the crucible of the Great Depression and World War II.   While Mr. Bassett was from a family of some means, he nonetheless readily volunteered when his country needed him in war and did not spend those years in a cushy non-combat assignment.   Members of his generation, to which the rest of us owe so much for their sacrifices and service, are rapidly passing from life’s stage and it is fortunate that written remembrances like this one leave a record for posterity.

This book is very well written by Mr. Mooney in an easily readable and chatty format.   The text is replete with names of people, horses, and places, yet I only saw two misspellings of people’s names and one typo in the entire manuscript.

One of the book’s redeeming qualities is that a section called Chapter Notes provides sources used to ensure accuracy.   Like all memoirs, time can interfere with accurate recollections and Mr. Bassett and Mr. Mooney have been careful to check their facts.   For instance, they used photographs to see who was in the five-person bidding party on a high-priced yearling that was sold at Keeneland.

Mr. Bassett applied the principles and lessons that he learned as a young man to his career in racing, as well as to helping worthy non-profit organizations like the YMCA and hospitals.   He discusses his life philosophies and experiences without coming across as preachy or self-absorbed and he is forthcoming about shortcomings like his temper.

For those attracted to the business side of horse racing, Mr. Bassett provides a valuable historic record of a man with unique insights.   He was integrally involved  in some of the important racing decisions and organizations of the past four decades.  While younger people were not around during many of the events and times referred to the in the book, they still can learn from the candor of a man with a world of experiences to offer. 

Copyright © 2009 Horse Racing Business

PENN NATIONAL GAMING — BUY, SELL, OR HOLD?

Penn National Gaming is headquartered in Wyomissing, Pennsylvania, near Reading in Berks County.  The Company owns 12 casinos, seven racetracks, and manages a casino in Ontario, Canada.  The casinos are located in Colorado, Illinois, Indiana, Iowa, Louisiana, Mississippi, and Missouri.  The Company’s three Thoroughbred racetracks are Black Gold at Zia Park in New Mexico, Charles Town Races and Slots in West Virginia, and Hollywood Casino at Penn National Race Course in Pennsylvania.  All three tracks have slots.  The Company’s harness tracks are Bangor Raceway in Maine, Freehold Raceway in New Jersey, and Raceway Park in Ohio.  The Bangor track has slots and the Ohio track in Toledo would be the site for a casino if Ohio voters pass a ballot initiative proposed for November 2009.  However, such initiatives have been turned down by Ohio voters four times.  The Company owns The Sanford-Orlando Kennel Club greyhound track.  Penn National Gaming operates six off-track-betting facilities in Maine, New Jersey, and Pennsylvania, and two advance deposit wagering properties: e-bet and Telebet.

On June 15, 2007, Penn National Gaming announced that it had agreed to be purchased by the private equity firm Fortress Investment Group LLC at a price of $67.00 per share.  Fortress ultimately decided not to follow through on the deal when Penn National Gaming’s stock price decreased dramatically, to the mid-$40 range by June 2008.   On July 3, 2008, Penn National Gaming entered into an agreement with Fortress and its affiliates terminating the agreement.  Penn National Gaming was paid $1.475 billion during 2008 in compensation.

With nearly $2.5 billion in revenues, Penn National Gaming is the third largest gaming firm in the United States. The Company has 930,335 square feet of gaming space, 27,735 slots, 409 gaming tables, 2037 hotel rooms, and 59 food outlets.  It employs about 15,500 people. Slightly more than 90% of the Company’s revenues come from gaming and most of the rest stems from food and beverages.

The Company’s revenues increased by 8.3% from 2006 to 2007 and then declined by 1% from 2007 to 2008. Earnings were $327.1 million in 2006, $160.1 million in 2007, and a negative $153.3 million in 2008.  Earnings per share were $3.88 in 2006, $1.81 in 2007, and minus $1.81 in 2008.  The 2006 earnings included $1.32 per share from discontinued operations. 

In the first quarter of 2009, Company revenues were up 9.2% over the same quarter of 2008.  It earned a net profit of $40.7 million in the first quarter 2009 and this is essentially the same as in the comparable quarter of 2008.

In 2007, the Company had a debt-to-equity ratio of 3.42, but this figure improved markedly to 1.52 in 2008.  Debt comprised 77.4% of the capital structure in 2007 and 60.4%in 2008. Penn National explained how it was able to reduce its debt:  “During the year ended December 31, 2008, our $2.725 billion senior secured credit facility amount outstanding decreased by $536.8 million, primarily due to principal payments on long-term debt, partially offset by the issuance of long-term debt for items such as payment for capital expenditures, funding associated with the opening of the Hollywood Casino at Penn National Race Course, privilege payments to the State of Kansas, and payments for income taxes owed and lobbying efforts, primarily in Ohio, Maryland, and Maine.  During the year ended December 31, 2008, we used a portion of the net proceeds from the Investment and the after-tax proceeds of the Cash Termination Fee [received from Fortress Investment Group] for the repayment of some of our existing debt, repurchases of our Common Stock, lobbying expenses for efforts in Ohio and the investment in corporate debt securities, with the remainder being invested primarily in short-term securities.”

Penn National Gaming identifies major risks impinging on its operations and results:

The Company’s operations are dependent on its continued licensing by state gaming commissions.  The loss of a license, in any jurisdiction in which the Company operates, could have a material adverse effect on future results of operations.

The Company is dependent on each gaming property’s local market for a significant number of its patrons and revenues.  If economic conditions in these areas deteriorate or additional gaming licenses are awarded in these markets, the Company’s results of operations could be adversely affected.

The Company is dependent on the economy of the United States…in general, and any deterioration in the national economic, energy, credit and capital markets could have a material adverse effect on future results of operations.

The Company is dependent upon a stable gaming and admission tax structure in the locations that it operates in. Any change in the tax structure could have a material adverse affect on future results of operations.

The U. S. economy has taken its toll on the Company.  In 2006, only two of its properties reported operating losses, whereas in 2007 this figure edged up to three, and then escalated to seven in 2008.

Another risk is that Penn National Gaming derives 37.5% of its net revenues from two properties-the Charles Town, West Virginia and Lawrenceburg, Indiana facilities.

As for the company’s outlook, management states: “…we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions, and property expansion in under-penetrated markets.”

Penn National Gaming’s stock has traded in the range of $11.82 to $47.08 over the past 52 weeks and closed at $28.49 on May 22, 2009.   The short interest in Penn National stock has decreased by nearly 26 percent in approximately the past month.  This statistic means that the number of investors who believe that Penn National stock will fall in price has dropped dramatically. 

Penn National Gaming is managed by experienced and proven top executives, backed up by a strong board of directors.  When the U. S. economy comes back and as consumers gain confidence and discretionary income, the Company is in a position to grow revenues and profits.  Penn National Gaming’s regional casinos have an advantage over Las Vegas in a down or recovering economy because players who live within easy driving distance of one of the Company’s facilities can save on travel costs.  Finally, revenues and profits for racetrack casinos, or racinos, have held up relatively well in the current recession, compared to other forms of gaming, and Penn National Gaming is strongly positioned in racinos.  This likely accounts for the Company’s return to profitability in the first quarter of 2009.  According to a report by the American Gaming Association, released on May 18, 2009, U. S. racino revenues tripled from 2002 to 2008, to $6.19 billion, and soared in 2008 by 17.2%. 

Bill Shanklin is not a shareholder of Penn National Gaming Inc. but has owned shares in the past.

Copyright © 2009 Horse Racing Business