All Business

MAGNA’S LAME HORSES

Is Stronach willing to bet the company on his money-losing racetracks?

STEVE MAICH November 29 2004
All Business

MAGNA’S LAME HORSES

Is Stronach willing to bet the company on his money-losing racetracks?

STEVE MAICH November 29 2004

MAGNA’S LAME HORSES

All Business

STEVE MAICH

Is Stronach willing to bet the company on his money-losing racetracks?

‘UNIQUE’ is not a real compliment. Unique is a word used when you’re searching for something nice to say and can’t find anything that sounds plausible. Like when somebody tells you, “Your shirt is really . . . unique.” It’s also commonly used by people who want to avoid the rules that everybody else lives by. As in: “I didn’t think the expense account policy applied to me because of my unique position within the firm.”

So it’s hard to argue when Frank Stronach and his executives at the Magna group of companies talk about their “unique entrepreneurial corporate culture,” as they do habitually.

There’s no denying it: Stronach is one of a kind. He came to Canada 50 years ago with a few bucks in his pocket and built one of the country’s biggest companies with hard work and moxie. He’s a rarity in Canada: a charismatic entrepreneur who believes leaders should lead, managers should manage, and shareholders should stay out of the way.

Oh sure, he’s aware of the push for greater shareholder rights. He just doesn’t think all that governance claptrap ought to apply to him. Don’t like it that Stronach collects more than $40 million a year for part-time consulting work and strategic guidance? Angry that he controls every company in the corporate family with multiple voting shares while holding a pittance of common stock? Well, tough nuts, buddy. Magna is unique. Frank says so.

But what’s good in Frank’s eyes isn’t always so hot for investors. And nothing more clearly defines the tension between Stronach’s interests and those of his company than the ongoing tribulations of Magna Entertainment Corp., the money-losing owner of 16 horse-racing tracks and the runt of Magna’s corporate litter.

MEC is 59 per cent owned by MI Developments, Magna’s real estate subsidiary, which is basically a dull company that makes decent money leasing buildings to other companies in the Magna group. But MEC is an albatross for MI, and that burden came crashing down in miserable thirdquarter results, released this month. Mi’s real estate business yielded a healthy profit of US$11.5 million between July and September, but its share of the losses at Magna

Entertainment were US$27.5 million. The company called the results “disappointing” and launched a review of MEC’s operations, looking for ways to cut costs and raise cash.

At this point you may be wondering why an auto-parts company owns racetracks, especially when they lose money. Many have asked that very thing over the years. And the answer is simple: the boss figures pony races are the future. “MEC will be one of the great global companies because of its unique content,” Stronach said in August.

Ah, but how to pay for Stronach’s grand vision? Magna Entertainment needs money, and lots of it. Several of its tracks are in desperate need of renovation. One facility, Florida’s Gulfstream Park, will alone cost about US$145 million to fix up, and there are plans

to rebuild at least two other sites in Maryland. Installing slot machines will help profitability at some locations, but it won’t be a panacea, especially given the spread of legalized gaming all over the continent that offers gamblers lots of choice in venues.

What makes things even more sticky is that those pesky Magna shareholders don’t want the company’s money used to prop up the racing business. In 2000, shareholder unrest got serious enough that Stronach had to promise not to use the auto-parts business to support MEC, at least until 2006. But that hasn’t stopped him from trying to

find spare change in Magna’s couch cushions to feed his beloved horse tracks.

Stronach thought he had the solution this summer when he proposed that MI Developments would buy out the rest of Magna Entertainment, sticking the real estate business with the full responsibility of funding the racetracks. But shareholders of both MI and MEC rose up against the deal. MEC investors didn’t like the price they were being offered, and MI shareholders raised the familiar worries about pouring more capital into the MEC money pit. Mi’s chief executive Brian Tobin, the former Liberal cabinet minister, resigned in the midst of the controversy after just five months on the job, and two other board members followed him out the door in the face of a shareholder mutiny. Stronach eventually pulled the offer and is now looking for other ways to support MEC.

That farce cost MI shareholders US$2.7 million in expenses related to the failed takeover bid, but what’s another few million between friends? Investors have grown used to money shuffling freely between Magna’s corporate siblings. For example, Magna’s auto-parts arm pays $9 million a year to Magna Entertainment so executives and guests can golf on two MEC courses in Canada and Austria—enough money to buy 60,000 rounds of golf at $150 a pop. That’s 164 games every day, including weekends. To answer your next question: yes, that’s why those guys get paid the big bucks.

It’ll take more than a couple of fat golf contracts to slake MEC’s thirst for cash, though. And that means Stronach is rapidly approaching a critical choice. Will he exert his will and use Magna’s wealth to advance his dream of building a global horse-racing empire, or will he yield to irritated shareholders who want Magna to focus on auto parts? Most companies would feel compelled to do the latter. But Magna is unique.

OH SURE, he’s aware of the push for greater shareholder rights. He just doesn’t think all that governance claptrap ought to apply to him. After all, Magna is unique.

steve.maich@macleans.rogers.com