by Frank Angst

Struggling Magna Entertainment Corp. should not automatically count on additional loans from MI Developments Inc., the corporation’s parent company largest shareholder.

In a conference call with analysts and investors on March 5, MI Developments Chief Executive Officer John Simonetti said Magna Entertainment likely would be unable to pay off an $80-million bridge loan from MI Developments as well as at least $100-million in Gulfstream Park construction funding due on May 31. Simonetti said MI Developments would consider giving additional money to Magna Entertainment as it attempts to pull out of debt by selling several racetrack properties, but he made no immediate commitment to additional loans.

“I believe [Magna Entertainment] will be unable to repay the bridge loan at end of May or be in position to repay $100-million in our construction loans at that time. [Magna Entertainment] will need to seek additional funds in the short term, from one or more sources, in order to give it more time to sell assets and pay down debt,” Simonetti said. “In this respect … we continue to investigate the possibility of [MI Developments] providing further assistance to [Magna Entertainment].”

On February 29, Magna Entertainment reported losing $113.8-million in 2007, bringing the company’s three-year losses to $306.4-million. While Magna Entertainment is a separate company from MI Developments with its own board of directors, MI Developments holds about 96% of Magna Entertainment’s total voting power in terms of outstanding stock and a 59% of total equity interest in Magna Entertainment. A real estate company, MI Developments rents factory and office space with auto parts supplier Magna International serving as a key customer. Frank Stronach is founder and chairman of all three companies.

Simonetti acknowledged that Magna Entertainment faces real problems, but said that the racetrack company’s real estate holdings are valuable.

“Management is aware of the ongoing challenges facing the company and significant debt load continues to result in unacceptable and unsustainable losses,” Simonetti said. “Our viewpoint, both as a controlling shareholder and a significant secured lender, is that we remain hopeful of a turnaround of this company’s fortunes.

“If a successful turnaround is achieved, I’m still of the view that there remain opportunities … for all [Magna Entertainment] shareholders including [MI Developments]. As I’ve stated before, [Magna Entertainment’s] significant real estate holdings are fundamentally large, strategic blocks of land in large urban centers. Notwithstanding the current U.S. real estate market, they remain extremely valuable, particularly as zoning efforts continue to be pursued.”

The struggling United States real estate market has hampered [Magna Entertainment’s] efforts to raise $600-million to $700-million through property sales. [Magna Entertainment] is attempting to sell Great Lakes Downs in Michigan, Portland Meadows in Oregon, Remington Park in Oklahoma, and Thistledown in Ohio, as well as property in Dixon, California and Ocala.

“At the end of the day, [Magna Entertainment] could not have picked a worse time from the last few years to sell significant blocks of real estate,” Simonetti said. “Although we believe [Magna Entertainment’s] real estate holdings are still quite valuable, selling them in this market will take longer than anticipated when we made our bridge loan back in September.”

Simonetti said MI Developments would consider giving [Magna Entertainment] more money until the struggling racetrack owner is able to sell some properties. Stronach is the effective controlling shareholder of both companies.

“We’ll study it, take recommendations to the special committee, and proceed from there,” Simonetti said.

Stronach has been serving as interim chief executive at [Magna Entertainment] since the June resignation of Michael Neumann. Neumann served less than four months as chief executive, a position held by five different people, plus Stronach, since 2000.

“It’s a unique business. The horse industry is not an easy one to understand. There are few horsemen with knowledge of that industry to really bring more of a business view,” Simonetti said. “It’s not just the horses. It’s the slots; it’s gaming; it’s entertainment. It’s trying to understand what people want. Then you have the technology aspect of the business as well. It’s hard for [Magna Entertainment] to find someone with that broad knowledge.”

Simonetti said, for now, Magna Entertainment needs someone who can quickly get things back in order.

“Having said that, I think we’ve arrived at a point that maybe what you need there, in the short term at least, is someone with some turnaround experience. Someone who can look at the operations and determine how best to package this company going forward,” Simonetti said. “It’s a unique business and trying to find someone with all of those different talents has not been easy.”

Despite the losses at Magna Entertainment, MI Developments posted $39,509,000 in net income in 2007. Still, that net income figure was down more than $20-million compared to 2006 with continuing operations at Magna Entertainment costing MI Developments $15.4-million in 2007.

Frank Angst is senior writer of Thoroughbred Times