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


The men on the inaugural Horse Racing Business “Power Dozen” for 2009 were selected because they have had a significant positive and/or negative effect on the horse racing industry in the United States. Some have been an influence over a long period of time while others have left their mark recently. The list represents the racing industry at all levels, from the racetrack to breeding and sales and support services.  A profile of each man depicts why he was chosen for this year’s list.

Peter M. Carlino, Wyomissing, PA.

Mr. Carlino is Chairman and Chief Executive Officer of Penn National Gaming, Inc., which owns the most racetracks of any U. S. company except for the bankrupt Magna Entertainment Corporation.   Penn National Gaming is traded on Nasdaq.  It owns twelve casinos, six racetracks, off-track betting facilities, and two advance deposit wagering subsidiaries. Its operations span fourteen states and Ontario.  The company’s racetracks encompass Thoroughbred and harness racing, plus one greyhound track. Four of the racetracks are racinos, combining horse racing with slot machines. Mr. Carlino is a graduate of Pennsylvania State University.

Robert N. Clay, Midway, KY.

Mr. Clay is the founder of Three Chimneys farm, which he operates with his wife Blythe. Their son Case is the President. Mr. Clay’s farm was home to Triple Crown winner Seattle Slew and currently stands Kentucky Derby and Preakness winners Smarty Jones and Big Brown, plus Barbaro’s sire Dynaformer.  His service to the racing industry includes leadership positions with the American Horse Council, the National Thoroughbred Racing Association, the Thoroughbred Owners and Breeders Association, Breeders’ Cup, the Keeneland Association, and the Kentucky Thoroughbred Association. Mr. Clay, a member of The Jockey Club, is a former trustee of The Blood-Horse magazine and past president of the Thoroughbred Club of America.  He is a member of the board of directors of PNC in Pittsburgh, Pennsylvania.  Mr. Clay is a graduate of the College of William and Mary.

Steven Crist, New York, NY.

Mr. Crist is Chairman and Publisher of the Daily Racing Form. More than any other person, he is the voice of racing to the most loyal fans who support the sport by putting up the money to fuel it. As the main force behind the Daily Racing Form and, the author of such books as Betting on Myself and Exotic Betting, and a blogger, Mr. Crist is the go-to guy for handicappers.  He is a bold risk taker, both as a businessperson and a bettor.  Mr. Crist is a graduate of Harvard.

Richard L. Duchossois, Barrington Hills, IL.

Mr. Duchossois is the founder of Duchossois Industries in Elmhurst, Illinois, which owns or has stakes in diversified businesses. He owns approximately 24% of the common stock of Churchill Downs, Inc., a Nasdaq-listed company with four racetracks, off-track-betting locations, slots facilities, and an advance deposit wagering subsidiary. He sits on the Churchill Downs, Inc. 13-member board of directors with his son, Craig J., and with the President and Chief Operating Officer of Duchossois Industries, Inc., Robert L. Fealy. Mr. Duchossois was Chairman and owner of Arlington Park racetrack when it was acquired by Churchill Downs, Inc. He has been honored by the racing industry with an Eclipse Award of Merit and was a recipient of the American Jockey Club’s Gold Medal. Other recognition includes a Special Sovereign Award from the Jockey Club of Canada and receipt of the Lord Derby Award in Great Britain. Mr. Duchossois owns Hill ‘N Dale Farm in Illinois, which has produced many winners of note. He is a member of the Jockey Club. Mr. Duchossois attended Washington & Lee University, but dropped out to fight in World War II.

William S. Farish III, Versailles, KY.

Mr. Farish and his family own Lane’s End Farm with locations in Kentucky and Texas. Lane’s End has been the leading stud farm in the United States ten times, including in 2008, and its stallion roster reads like a Who’s Who.   Mr. Farish hails from Houston, Texas, and has a background in oil and stock brokerage.  He is a Steward and Vice Chairman of the Jockey Club and the President and a director of Keeneland Trustees, Inc., the owner of the Keeneland Association.  The Keeneland Association operates Keeneland racetrack in Lexington, Kentucky, runs the world’s biggest and most prestigious Thoroughbred auction, and is half owner of  Turfway Park racetrack near Cincinnati, Ohio.  Mr. Farish previously served as Chairman of Churchill Downs Inc. and as a director and Chairman of the Executive Committee of the Breeders’ Cup.  He was President George W. Bush’s Ambassador to the Court of St. James for three years, including during the difficult period immediately following the September 11, 2001 attack on the World Trade Center in New York.  He attended the University of Virginia.

Michael Ivarone, Garden City, NY.

Mr. Iavarone founded International Equine Acquisitions Holdings (IEAH) in 2003. He is President and a director of IEAH and has brought many newcomers into Thoroughbred racing as investors. IEAH has posted a truly remarkable record. In 2008, IEAH had only 243 starters but won 58 races, for a 24% rate, and led all owners with $10.7 in purse earnings.  Twenty five of the wins came in stakes races and eleven were Grade 1 victories. The Grade 1 wins were with eight different horses. IEAH’s Big Brown won the Kentucky Derby and the Preakness and was named champion 3-year-old. Its Benny the Bull won the Group 1 Dubai Golden Shaheen and was voted champion sprinter. IEAH is building the Ruffian Equine Medical Center at Belmont Park. Mr. Ivarone is a graduate of St. Joseph’s College in New York.

Jeffrey P. Jacobs, Cleveland, OH.

Mr. Jacobs, whose family was prominent in shopping center development and once owned the Cleveland Indians Major League Baseball franchise, fully or partly owns and controls four racetracks.  He is the Chairman and largest shareholder of MTR Gaming Group.  Its properties are Mountaineer Casino and Racetrack in Chester, West Virginia, Presque Isle Downs in Erie, Pennsylvania, Scioto Downs in Columbus, Ohio, and a telephone and online wagering company.   In addition, Mr. Jacobs is the owner and Chief Executive Officer of Colonial Downs in New Kent, Virginia. He is Chairman and CEO of Jacobs Entertainment, Inc., a developer, owner, and operator of gaming and pari-mutuel wagering facilities throughout the United States. He is also Chairman and CEO of Black Hawk Gaming, Inc.  He earned an MBA from Ohio State University.

John Magnier, Fethard, County Tipperary, Ireland.

Mr. Magnier, a high-rolling entrepreneur in racing and other ventures, is arguably the world’s foremost expert in the art and science of stallion selection. His interests have included the famous Manchester United soccer franchise, restaurants, and resorts.  Mr. Magnier began the Coolmore Stud in Ireland in partnership with his father-in-law, the renowned trainer Vincent O’Brien, and the late soccer-pool heir and Thoroughbred mover and shaker Robert Sangster. Since then, he has taken sole ownership and expanded Coolmore’s reach to three continents. Mr. Magnier’s Ashford Stud is one of the premier stallion stations in the United States. His many high-price purchases at the U. S. yearling sales and 2-year-old-in-training sales have been a major factor in maintaining a strong bloodstock market. In 2006, Mr. Magnier and his partners paid $16 million for a 2-year-old colt, The Green Monkey, at public auction, which is the highest price ever for a horse sold through an auction. The urbane Mr. Magnier is sometimes referred to as a “farmer in pinstripes.”

Mohammed bin Rashid Al-Maktoum, Dubai, United Arab Emirates.

Sheikh Mohammed is the Vice President and Prime Minister of the United Arab Emirates, Ruler of Dubai, and owner of Godolphin racing and Darley Studs with locations in Lexington, Kentucky, and five countries besides the United States. Darley is a namesake of one of the three foundation sires of all Thoroughbred racehorses, the Darley Arabian. Sheikh Mohammed’s stallions are among the best and his horses have won most of the outstanding races around the world. His junior wife, Princess Haya bint Al-Hussein, owns Raven’s Pass, who won the 2008 Breeders’ Cup Classic, and the Sheikh’s Midshipman won the 2008 Breeders’ Cup Juvenile.  In 2008, Synergy Investments, Inc., with close ties to Sheikh Mohammed, purchased the Fasig-Tipton auction company. Like John Magnier, the Sheikh’s many purchases have supported the auction business at Fasig-Tipton, Keeneland, and elsewhere. The Sheikh sponsors the world’s richest race, the Dubai World Cup.  He has expressed his affection for racehorses in his poem “To the Equestrienne.”

Ogden Mills Phipps, Palm Beach, FL.

Mr. Phipps’ father, Ogden Phipps, and his grandmother, Mrs. Henry Carnegie Phipps, raced some of the great horses of all time, including Bold Ruler, Buckpasser, and Personal Ensign. His late sister, Cynthia, was also a successful owner. Mr. Phipps and his family breed and race their own stock and have broodmares with some of the finest bloodlines and racing records. The Phipps stallion Seeking the Gold has left his mark as a sire. Mr. Phipps is the Chairman of the Jockey Club and a trustee for the Breeders’ Cup, the National Thoroughbred Racing Association ,and the New York Racing Association.  Throughout the years, Mr. Phipps has been a leader in important racing initiatives and he has been a stalwart of the sport through thick and thin.  In recognition of his efforts, he was awarded the Eclipse Award of Merit.  Mr. Phipps is a graduate of Yale.

Frank Stronach, Aurora, Ontario.

Mr. Stronach is a prolific entrepreneur. In the 1950s, he immigrated from his native Austria, virtually penniless, to Canada and founded and built a business empire. He is the Chairman of Magna International, an auto parts firm, and MI Developments, a real estate enterprise. In 1998, Mr. Stronach created Magna Entertainment Corporation for the purpose of acquiring and operating racetracks. The company recently filed for bankruptcy and this failure is having the most influence on racing in the United States of any event in several years. Mr. Stonach owns Adena Springs Farm in Paris, Kentucky, and Williston, Florida. He earned an Eclipse Award as both the outstanding breeder and the top owner for 2008, which is the second time he has achieved this double; Adena Springs was North America’s leading breeder by earnings in 2008 for the sixth consecutive year. The farm stands such classic winners as Awesome Again, Touch Gold, and Ghostzapper.

David Williams, Burkesville, KY.

Mr. Williams is President of the Senate in the Kentucky Legislature. He is not directly involved in the horse business, but he has influenced the horse racing industry in a momentous way by adamantly opposing legislation that would allow Kentucky voters to decide for themselves whether to permit slot machines at the Commonwealth’s racetracks. This impasse threatens the breeding industry in the state with the most prominent Thoroughbred stallions, imperils Kentucky racetracks and the overall quality of racing, and thereby contributes to the further weakening of the Commonwealth of Kentucky’s most important industry.  Mr. Williams is a graduate of the University of Kentucky and the University of Louisville School of Law.

A Baker’s Dozen: Power Player in Perpetuity

Andrew Beyer, Washington, DC.

Mr. Beyer is a retired racing columnist for the Washington Post. His name will live on as long as there is handicapping on Thoroughbred horse racing. His influence is evident when someone reads or talks about a horse’s “Beyer,” the speed figure developed by Mr. Beyer and scrutinized by handicappers reading the Daily Racing Form past performances. Mr. Beyer attended Harvard.

The May 9, 2009 Horse Racing Business will profile the “Power Dozen” women in horse racing.

Copyright © 2009 Horse Racing Business


In the final week of December, 2008, a newspaper headline was ominous:  Retail experts predict more store closings, bankruptcies, layoffs in 2009.”


Will pari-mutuel retailer Magna Entertainment Corporation (MEC) be among the casualties?


The Toronto-based Magna Entertainment was launched in 1999 and its stock is traded on the Toronto Stock Exchange and on Nasdaq.   MEC states in its U. S. Securities and Exchange Commission  (SEC)  filings:  “Based on revenues, MEC is North America’s number one owner and operator of horse racetracks, and is a leading supplier, via simulcasting, of live racing content to the growing inter-track, off-track, and account wagering markets.”  


While this statement is factually true, Magna Entertainment is certainly not a leader when it comes to profitability.  The company has a consistent record of losses and the red ink is burgeoning, so much so that the “Going Concern” section in  its SEC filings is unequivocal: “…the Company’s ability to continue…  is in substantial doubt and is dependent on the Company generating cash flows that are adequate to sustain the operations of the business, renewing or extending current financing arrangements, and meeting its obligations with respect to secured and unsecured creditors, none of which is assured.”


Unfortunately, Magna Entertainment cannot survive on its present course.  Its current ratio, which measures the company’s capacity to meet its maturing obligations, is dangerously below 1, the bottom-line losses are mounting, the company has a negative cash flow, the debt load is growing, MEC is unprofitable on an EBIDTA (earnings before interest, depreciation, taxes, and amortization) basis, and the faltering economy is not conducive to MEC boosting racetrack handle and selling off properties to reduce the debt burden.  In short, the reality is grim and deteriorating rapidly.  Compounding the difficulties, the company has repeatedly had destructive turnover in its top management ranks.  To be sure, a bright spot for MEC is the likely prospect of getting slot machines for the company’s Laurel Park racetrack in Maryland, but that would not be nearly enough or soon enough to rectify the situation.


Moreover, although MEC did a 1:20 reverse stock split, effective July 22, 2008, in order to get its stock price over $1 per share and comply with Nasdaq requirements, the share price has again fallen below $1.  Consequently, MEC is in danger of being delisted by Nasdaq, in which case the stock would trade on the Over the Counter Bulletin Board or on the Pink Sheets.


Magna Entertainment has closed down some facilities and has a number of its smaller racetracks up for sale.  If  MEC could sell one or more of these, it would provide cash to at least mitigate the debt load, but this is a big if in the current economic downturn.  Even were MEC to sell all of the properties it has for sale, in the near future, it still might not be viable because it has a negative EBITDA in all of its geographic operations, including California and Florida where its two best-known racetracks are located.   


MEC’s dilemma is the result of too fast of growth fueled by too much debt to digest and perhaps of overpaying for acquisitions.  The company is de facto bankrupt with no good options left and has destroyed a lot of shareholder wealth.


The judgment here is that most of the MEC racetracks would have a better chance at profitability if they were sold off piecemeal, provided that the new owners bought at a reasonable price (i.e., a price justified by the cash-flow potential) and substituted an equity infusion for debt.  Recapitalization would free management of the onerous task of meeting the interest payments on the debt and thereby allow them to make capital improvements, enhance customer service, and devote more resources to sales and marketing.  


On their own, the racetracks would also be free of the corporate overhead now allocated to them by MEC.  Finally, privately-owned racetracks would not incur the significant costs that come with being a publicly-traded company and all of the associated government-mandated reporting.  And owners would not be as vulnerable to shareholder litigation. 


Magna Entertainment’s founder, Frank Stronach, has a personal story that is both remarkable and inspirational.  It is the journey of a young Austrian immigrant to Canada, who rose from being dirt poor to become one of his adopted country’s wealthiest and most prominent citizens.  Magna International, the auto parts company he started, was the centerpiece of Stronach’s rags to riches saga.  


Stronach also became one of the luminaries of Thoroughbred horse racing.   His farms have bred the winners of most of the sport’s premier events, including Breeders’ Cup races and the Preakness and the Belmont.  What he has tried to do for racing with Magna Entertainment is commendable and entailed a risk that he did not need to take on.  But it has not worked as planned.


Like Stronach and all serial entrepreneurs, they inevitably experience their share of failures.  For Stronach, the Achilles’ heel has been Magna Entertainment, which is not surprising:  an entrepreneur’s sparkling success in one industry does not mean that the person has gained the acumen to be successful in another industry with vastly different characteristics.  The skills and knowledge needed to start, build, and operate an auto-parts industrial company are not the same kinds of competencies required in a retail horse-racing franchise.


The racing industry and its many constituencies have an enormous stake in Magna Entertainment’s outcome.  The shock waves of an outright MEC failure would reverberate throughout the racing world, particularly if the company’s Santa Anita and Gulfstream Park properties were to go the way of commercial and/or residential development in a bankruptcy.  A bloodstock business with a shrinking base of racetracks from which to retail and showcase the product is on a precarious trajectory.   


Major stakeholders in the horse racing industry need to consider purchasing individual MEC racetracks and retaining the best sports/retail executives they can find to operate them, probably via equity-sharing incentive compensation.  Attempts have already been made to buy some of the MEC racetracks, but now that the company’s situation is so desperate, negotiations could be more productive.     


(Full Disclosure:  Bill Shanklin is not a shareholder in Magna Entertainment Corporation and does not have the company’s stock shorted.)


Copyright © 2009, Horse Racing Business


Coming Attractions:


January 17, 2009:  While Kentucky Slept


January 31, 2009:  When Kentucky Awoke


Racetrack companies whose stocks are publicly traded will be assessed in the coming months.