An official publication of Global Gaming Expo

DECEMBER 2002 

Magna-tized!

The racing industry will never be the same if Magna Entertainment has its way, and that may be a good thing

By PATRICIA A. MCQUEEN

Some call it consolidation, others prefer the term restructuring. Regardless, the racing industry is undergoing significant changes.

Groups of racetracks are being gathered under single corporate umbrellas, with the leaders being Magna Entertainment Corp. and Churchill Downs. Historically a collection of individual fiefdoms, the American racing industry is now attempting to reinvent itself as a major force in the gaming and entertainment market.

Magna has perhaps the most ambitious plans of any racetrack operator in the world. The company is the creation of Frank Stronach, a longtime horse owner and breeder and chairman of parent company Magna International, a leading automotive systems and components company based in Canada. It is under Stronach’s guidance that the company has stormed into racetrack ownership, often clashing with the racing industry establishment along the way.

“The company is very controversial, and I think they thrive on that controversy,” said Michael Tew, an analyst with Bear, Stearns & Co. Inc. “They wanted to try to shake up the industry, and I think they’ve been able to do that.”

Magna should be making the racing industry nervous, according to company president and CEO Jim McAlpine, because the industry has done little more than routine maintenance in the past few decades. During that time, Las Vegas operators and organizations such as Disney spent billions on new facilities and entertainment parks.

“Las Vegas did a great job of converting from a simple gambling operation to a destination entertainment center. They offer first-class shopping and entertainment experiences, they wrapped it around basic gaming, and the rest is history. We think you can do the same thing at racetracks.

“That’s not to say that we have all the answers or that we’re a bunch of smart apples either,” McAlpine continued. “But it is to say that things needed to change for the better, and hopefully we can provoke some of that change. Because if we don’t, we’ve got more to lose than anybody. We’re the only guys that invested $1 billion in this industry during the last four years.”

Those investments, primarily in the form of racetrack acquisitions, provide the foundation for the company’s strategic plans. Critics argue that those plans seem to change on a moment’s notice, and question whether there really is any substance to the grandiose ideas tossed about seemingly at random. Insiders insist that there is.

“Frank Stronach is a victim of his own exuberance,” said a racing executive familiar with Magna who asked to remain anonymous. “He’s got lots of ideas and throws them out there all the time. At the same time, his core views [about racing, entertainment, and destination centers] haven’t changed. The general vision he has of trying to make the facilities more user-friendly and to introduce new things to racing is validated in a lot of ways. It’s just that now that he’s got his feet wet, he realizes it’s not going to all happen overnight, and that Magna is going to have to phase it in and look at what they do in each market. But they’re going to get there.”

McAlpine is also convinced of that, acknowledging that sometimes plans change along the way. “We have a very clear-cut and defined plan, but we listen to people. If there’s something we missed, we’ll change directions if it makes sense.”

He doesn’t think Magna has been terribly inconsistent, he simply pointed out that as a startup company with an inquisitive nature, things sometimes take longer than expected. In addition, by visualizing out loud and provoking the industry, Magna has been able to improve on its ideas along the way.

“Some of the criticism about not following through on plans is quite valid but understandable,” said Jeff Rabin, an analyst with Dundee Securities. “I think they underestimated the difficulty in executing the plans, and of how long it would take. I did too. But I think these are short-term things, and I like what they’re trying to do.”

Just what is this seemingly misunderstood and controversial company trying to do? Plenty, if you ask its current leadership. “Our real vision is to become the world’s leading electronic media wagering entertainment company,” said McAlpine. “We see an opportunity to combine the bricks and mortar business of horse racing with technology to distribute it in a way that’s never been done before.”

To accomplish those goals, a lot of things needed to be done. The first step was to acquire content, and at this writing Magna owns 14 racetracks, including those transactions expected to be completed this month. They include two of the premier tracks in the country, Santa Anita Park in California and Gulfstream Park in Florida, and other tracks scattered around North America. Combined, those tracks will represent 1,800 racing days in 2003.

McAlpine emphasized that each purchase was part of a carefully thought-out strategy. In looking at the horse racing industry in the United States, he noted that six states are critically important: California, Florida, Kentucky, New York, Maryland and Texas. Magna’s acquisitions now include tracks in four of those states, and there are logical reasons for the other purchases.

Great Lakes Downs, although offering content, was more important to the company by getting it a foothold in Michigan. Ultimately, Magna would like to be closer to the Detroit market, and in fact has applied for a new track license there. Cleveland is a great betting market, according to McAlpine, and there, Thistledown came bundled with Remington Park in Oklahoma. The Oregon tracks came with a number of OTB locations and hub wagering opportunities, and The Meadows in Pennsylvania came complete with its OTB facilities and account wagering system.

With its current group of tracks, Magna has reached the critical mass necessary to move on to the next steps of its master plan, the first of which all focus on distribution — enhancing MEC-branded OTB locations, and further developing interactive wagering platforms such as XPressBet, XPressBet.com, and eventually interactive television. However, McAlpine indicated there are still a couple of major markets the company would like to be involved in, so don’t be surprised by more acquisitions.

On the OTB side of the equation, McAlpine thinks Magna can increase the number of its locations from 34 presently to as many as 75, all representing potential incremental business. There will also be an effort to make those locations uniformly “Magna” — to turn them into high-energy sports bars with racing as the centerpiece and offering superior customer service. That’s part of an overall branding strategy for the Magna properties, which is now under way in earnest with the recent addition of Peter Beresford as executive vice president of marketing and strategic planning. Beresford comes from a long career in corporate marketing at McDonald’s Canada, so he’s very familiar with brand equity.

Branding will be critically important for all of Magna’s activities, but it is the in-home market that is most intriguing. Horse Racing TV, a 24/7 channel launched on the Race Track Television Network, is a big part of the company’s distribution strategy. And while Internet and phone account wagering are here now, McAlpine expects that interactive television will also become a reality. “Our sport and wagering activity is absolutely geared toward that environment.”

Magna’s strategy here is validated by its main competition, TVG, which has been operating a racing and wagering channel for some time. TVG and Magna are essentially competing for business, along with a handful of other account wagering operators in North America.

Some of the tracks TVG offers are participating on an exclusive basis, meaning they are not offered on competing systems. Some industry analysts are concerned that exclusivity is actually inhibiting the growth of account wagering, but it’s just the way the fledgling market has developed thus far.

Jack Liebau is president of Magna’s California operations, where account wagering started last January and where competition between TVG and XpressBet is most intense.

“In the end, market forces will work toward the best interest of the racing fan,” he said. “Magna’s position all along has been that it is willing to exchange signals [with TVG], and that offer has not been accepted.”

Magna has added about 12,000 names to its interactive customer base in the past year, and McAlpine expects that number could grow to 150,000 or 200,000 over the next several years. Those customers should provide significant new revenues to the company, which is prepared to tackle the legislative challenges in many jurisdictions that will hinder racing’s growth until they are resolved.

Now that Magna has acquired content and started putting together its distribution strategy, McAlpine stressed that it’s important to go back and examine the horse racing product to ensure quality racing at all Magna’s facilities. That means both the quality of horses and the size of the fields.

That’s the concern that launched Palm Meadows, a state-of-the-art training facility being developed north of Miami. By providing 1,400 stalls, the facility will support Gulfstream Park, especially if Magna decides to run a longer meeting there.

“That’s the kind of investment we’re making to support our primary goal of improving the quality of horse racing,” said McAlpine.

Magna will also reaffirm its commitment to the customer, something always in sight but that perhaps got overshadowed as the company spent time obtaining content.

When asked about Magna’s seeming inability to follow through on some of the elaborate promises made when acquiring tracks, McAlpine responded: “In business you have to be flexible. You get different opportunities at different times and you have to weigh those against your priorities. Opportunities did come along, many of them earlier than we anticipated. And because our whole business plan is based upon having content, we seized some of those opportunities.”

He emphasized that Stronach’s original vision of entertainment destinations hasn’t changed. It’s just that those visions include fully integrated facilities, “where the retail entertainment complex becomes the new front door to the racetrack.” That integration takes time to plan and organize, and to find retail specialists who will partner with Magna.

Still, McAlpine cited improvements already made at a number of the tracks, including $45 million in work at Santa Anita. “I understand that maybe some people don’t get the whole picture, or that some people might have different motivations, but the truth is that we have spent considerable amounts of money at virtually every one of our racetracks. And we will continue to spend money” as needed at the various tracks.

California dreamin’

Santa Anita is just one of Magna’s three California racetracks; the others are in the San Francisco area: Bay Meadows and Golden Gate Fields. Magna has also announced plans to build a new world class racetrack in Dixon, near Sacramento. That track would supposedly replace Bay Meadows in the Northern California market, although Bay Meadows seems to be holding on to life longer than anyone dreamed.

“For the better part of my career at Bay Meadows, [the track] had been written off many times, and its demise was thought to be imminent,” said Liebau. “But not now.”

He explained that the owners of the property (it is leased for racing purposes) have had numerous problems getting it zoned for development, and in the meantime the real estate market in the area has deteriorated. As a result, there’s not much of a market for development right now, even if the entitlement process gets completed.

Still, eventually Bay Meadows will close, and rather than have all racing conducted at Golden Gate, Magna wants to build the new track in Dixon.

“If the two tracks were owned by someone who didn’t fully understand the racing business,” said Liebau, “then economics dictate that an attempt be made to consolidate all of the dates at one track, which would be more profitable. But it isn’t in the best interests of racing to run all those dates at one track. That’s why Magna is looking at an alternative facility in the Sacramento area.”

Magna’s three newest acquisitions are Lone Star Park, near Dallas, the Maryland Jockey Club, which includes two racetracks and a training center, and Flamboro Downs in Ontario. The Lone Star deal was completed in October; the other two were expected to close by the end of this year.

Lone Star president Corey Johnsen has been named Magna group vice president for Florida, Texas and Oklahoma. Magna’s ownership ensures sufficient capital will be available to prepare Lone Star to host its first Breeders Cup in 2004.

Johnsen is also certain that Magna will ultimately follow through on its elaborate plans with all of its facilities, despite some of the delays and permitting setbacks in some jurisdictions.

“I have developed two horse tracks from the ground up, so I understand the time it takes to break new ground. An organization in the acquisition mode is similar — the process takes time. When all the deals are closed and all the tracks integrated, the industry will see tremendous progress which will positively affect all participants in the sport.”

Certainly that is the hope in Maryland. The Maryland Jockey Club, which owns Laurel and Pimlico racetracks, has itself been the subject of much criticism over the past few years, particularly with the declining condition of Pimlico, which hosts the Preakness Stakes, the middle jewel in racing’s Triple Crown.

Magna’s purchase is actually an alliance with the current owners of the MJC, who will continue to be involved for a period of time after the deal is finalized.

Initially it was announced that Magna would tear down Pimlico and rebuild it from the ground up, but decisions on how best to proceed in Maryland will take time to sort out the issues of stabling capacity and the ability to hold the Preakness.

And with the November election resulting in a new governor favorable to racetrack slots, it is likely that any plans for both Laurel and Pimlico will be on hold pending legislative decisions in the upcoming session.

Speaking of slots, Flamboro was a welcome acquisition from the investors’ point of view, because it is home to more than 750 slot machines and as such generates significant cash flows. As per an agreement with the Ontario Lottery and Gaming Corp., 20 percent of slot proceeds in Ontario go to track owners, half of which are then given to horsemen.

“Flamboro is a good acquisition for them,” said Tew. “It’s going to be one of the few accretive acquisitions they’ve made in the past year.” The track also gives the company some experience with slot machines, even although the machines themselves are owned and operated by the OLGC.

Alternative gaming

That experience with gaming should hold the company in good stead in the near future, and any potential revenue opportunities won’t be overlooked. “Governments have an ever-increasing need for revenue,” noted McAlpine, “and now they are looking at alternative forms of gaming in a variety of states.”

He agreed with many others in the industry that racetracks are ideal places for gaming, because they are already highly regulated facilities that are experienced in dealing with the betting public.

It is the potential of alternative gaming that has the investment community staying in Magna’s corner, for the most part. “People in the industry are very critical of Magna,” said Tew. “But investors tend to like the Magna story, because they see a tremendous amount of upside potential, particularly from the expansion of gaming.”

Indeed, Magna’s properties have a broad geographic base, and some are located in states where alternative forms of gaming are increasingly likely prospects. “We have already seen this geographic diversity bear fruit in the recent elections, where pro-gaming governors were elected in Maryland and Pennsylvania, two states in which Magna operates,” said Tew.

Still, there are a few things that would make the investor community more comfortable with Magna. Most simply involve better communication and guidance, something McAlpine said would come as the company moves out of its acquisition phase. “The investment community is extremely important to us,” said McAlpine. “One of our goals is to be a very good communicator.”

Analysts also hope the company will turn more attention to its existing properties. “I’d like to see them reap the benefits of synergies generated from cost-cutting and other margin improvement initiatives in the pipeline, similar to what they have done [by streamlining management] in California,” said Tew. “They should also focus on some of their planned new development efforts in terms of expanded entertainment options in OTBs and the racetracks, particularly Gulfstream Park. Just those two initiatives alone would be proof that the company is executing on its original strategy.”

While some analysts remain cautious, others are very enthusiastic.

“I’m a big fan of the company for a couple of reasons,” said Rabin. “One is that I like horse racing, and they are injecting a lot of resources and smarts into the business, and they are trying to attract more people to racing. But going deeper into it, they have one of the most impressive management teams that I’ve ever met.

“They haven’t done everything perfectly — no one has — and they have ruffled a few feathers,” said Rabin. “But now Magna is not being as aggressive as they first were, they are listening a bit more, and being much more respectful of the way the tracks have been run, even if that slows them down a bit.”      

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