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Magna Bankruptcy Leaves Fate of Preakness Uncertain

May, 2009
by Terry Conway

On a warm and muggy Tuesday afternoon in 1873 a lively crowd of 12,000 swarmed onto the grounds and stands of the Pimlico Race Course to watch Survivor's runaway victory in the inaugural running of the Preakness Stakes.

The winner's name seems quite appropriate these days. Once proud, Pimlico is now a shell of its heyday self, caught in the vortex of the Magna Entertainment Corporation Chapter 11 bankruptcy. The litigation threatens to swallow up Magna's racetrack properties across the country, and perhaps even the Preakness.

Magna owns Pimilco and Laurel Park in Maryland as well as the rights to the lucrative Preakness Stakes that is held the third Saturday in May.

What's at stake? Beyond the "storied tradition" of the Preakness, there is the more than $30 million generated for the state of Maryland in just one day. In addition, the state racing industry would lose a tax break worth $20 million if the second leg in the Triple Crown decides to gallop away.

Under the urging of Maryland Gov. Martin O'Malley, the state legislature quickly passed an emergency bill on April 11 that authorizes the state to exercise eminent domain over Pimlico Race Course and all rights associated with the Preakness as well as the Laurel Park racetrack and the Bowie Race Course training center.

The state's acquisitions would raise some thorny issues. Legally, how do you fairly value an "intellectual property" like the Preakness? More practically, who would operate the racecourses?

While the Preakness will be held at Pimlico on May 16, 2009, where the 2010 race will be held is entirely unclear. "If the Preakness goes, you can turn out the lights on Maryland's horse industry," said Mike Pons, the business manager of Country Life Farm in Bel Air, Md.

He is the grandson of Adolphe Pons who founded Country Life Farm in 1933. As turf advisor to August Belmont II, Pons handled the sale of Man O' War at the 1918 Saratoga Yearling Sale. The legendary Cigar, winner of 16 consecutive races with lifetime earnings just shy of $10 million, was foaled at Country Life.

"I just don't see the Preakness leaving because it's such a valuable asset," said Pons. "Magna was this big lumbering elephant looking for a happy hunting ground. With their mountain of debt they couldn't make the necessary capital improvements at Pimlico. They were just trying to stay alive. There are a lot of unanswered questions, but I see Magna's bankruptcy as a huge opportunity as well."

Stronach Expansion

The Chairman and CEO of Magna, Frank Stronach's grandest dream was building his beloved horse racing business into a global powerhouse. In the 1990s Magna began snapping up racetracks across the country, including Gulfstream Park in Florida, Lone Star in Texas, Santa Anita in California, and Pimlico and Laurel in Maryland. They all could be on the chopping block.

Maryland racing and breeding has been behind the eight ball since the mid-1990s when neighboring states introduced slots casinos and those newfound revenues fattened track purses. In recent years Pennsylvania's in-state breeder racing purses have soared thanks to its slots revenues making breeding thoroughbreds a more lucrative proposition.

Last fall slot machines finally won approval in a statewide referendum. Under Maryland law, holders of slots licenses must contribute 9 percent of the gross proceeds to the racing industry, in a mix of subsidies for purses, capital improvements, and operating funds.

Location of the slot facilities has not been resolved. The Maryland Jockey Club that oversees financially strapped Pimlico and Laurel Park had hoped to salvage the tracks by putting slots at Laurel. Not so fast. Laurel's bid for a slots license was disqualified in February when Magna failed to come up with $28.5 million in license fees.

Not as Smooth as PA

Maryland's bid for slots machines hasn't gone as smoothly as Pennsylvania's, which produced a staggering windfall for horseracing. Simply put, Pennsylvania framed its slots issue as a win-win for nearly everyone—property tax relief, and a boom to the horseracing and agriculture industries. In addition, Gov. Rendell was 100 percent behind the slots legislation and made use of his persuasive power. Then along came Smarty Jones whose superlative races generated such positive publicity for the sport that enough politicians caved in and passed the legislation.

For the past decade Maryland has lacked the political will as top guns in the Maryland legislature fiercely fought any proposed slots legislation again and again. In a last ditch effort a slots referendum by voters passed last November. Meanwhile Maryland's racing industry regressed badly. Among the advantages that slots revenue has afforded racing in neighboring states are cash bonuses for top-finishing horses that are bred in-state. Such bonuses encourage horsemen to move operations to those states, and their gain has often been Maryland's loss.

Industry Linchpin

The Preakness is the golden egg. It generates the majority of Pimlico's income and supports Maryland's thoroughbred industry for the rest of the year. Gov. O'Malley's administration estimates the horse industry supports 5,800 direct jobs and 15,000 indirect ones and has an annual economic impact of $1.5 billion.

Losing horse racing — and especially the Preakness — would kill any incentive to breed horses in Maryland, maintained Country Life's Pons. A Maryland-bred fund currently pays out between $4 million and $5 million a year to state breeders and owners that run their horses in the state.

The largest sporting event in Maryland, the Preakness attracted 112,000 people to northwest Baltimore in 2008. But beneath the pageantry and parties trouble has lurked. Over the past decade when fans rolled into town they were greeted by grim news reports detailing Maryland's falling star in the racing industry. In mid-March Stronach told The Baltimore Sun his company would sell Pimlico and Laurel Park for the right price.

As for the Preakness, news reports have linked Churchill Downs, Inc. and Penn National Gaming Inc. to the purchase of Pimlico, Laurel and the Preakness. Both have strong cash positions. Another name floated is former part owner Joe De Francis who sold the Maryland Jockey Club and its entities to Magna in 2002 for $117.5 million.

In early April the Cordish Cos., a Baltimore-based real estate development company, announced it would place a bid to operate the racetracks and host the Preakness Stakes at Pimlico. That follows their bid for a slot-machine license at a shopping mall in Anne Arundel County. If successful, the company would build a $1 billion casino adjacent to the shopping mall later this year.

Country Life's Pons says his grandfather survived the Depression and World War II, so he's still hopeful even though Maryland has been hit by what Pons calls the "perfect storm."

"We've gotten walloped with the slots bill stalled, the Magna bankruptcy and a very bad recession," said Pons. "But I tend to look at the glass as half-full. With new ownership we can have much stronger, viable racetracks and racing industry.

"We just need our share of the slots revenues. We've had a wonderful infrastructure for breeding and raising horses for generations. We just need the cash to bump up our purses and breeding funds."

PA Still Booming

Las Vegas gambling operators are suffering mightily in the recession: empty casinos, stalled expansion projects, and plummeting stock prices. Ditto Atlantic City. Not so Pennsylvania. The Gaming Control Board announced that the gross revenue at six casinos across the state grew by 14 percent in February, as compared to February 2008. Philadelphia Park in Bensalem, Pa. saw revenue jump up by 6.45 percent in the same period.

A seventh casino that opened last month was not included in those numbers. And there are still seven more slots licenses to be awarded.

Slots revenues have fueled a dramatic upswing in Philadelphia Park's purses-- doubling to $280,000 to $300,000 a day over the past few years. The flood of money has lured better horses for better races.

"We've got top-tier trainers like Todd Pletcher, Kieran McLaughlin and Steve Klesaris wanting to stable here," Philadelphia Park Racing Director Sal Sinatra told NJ.com. "We're also able to pay the jockeys more per mount, going from $45 to $100. Everybody is doing better."

Still, the on-track handle has taken a hit. Along with a dismal economy, bettors at Philadelphia Park who once had run of the entire building are now shoehorned into one floor. By year's end a stand-alone casino should be finished allowing the horseplayers to take back the original building.

One bright spot is the track's simulcasting signal. It is being received at more tracks or betting sites than ever before. The home track pulls in a hefty 17 percent of the bets wagered from other facilities.

Mid-Atlantic Power

Even though slot machines slot machines finally won approval in a statewide referendum, most analysts don't expect Maryland's horse racing prospects to change until its first slot parlors open within 18 to 24 months.

Some see the prospect of new competition from Maryland as enhancing the overall attractiveness of racetracks situated in the Mid-Atlantic region.

"Philadelphia Park, Charles Town, Laurel, Monmouth Park, the Meadowlands are all within a two-hour ship," said Joe Santanna, president of the Pennsylvania Horseman's Benevolent Association. "For horsemen, it's an unbelievable opportunity."

Slots revenues have also supercharged the state's breeding fund that has soared from $7.98 million in 2005 to more than $20 million this year, according to Mark McDermott, executive secretary of the Pennsylvania Horse Breeders Association (PHBA). The number of state-registered foals has spiked as well, soaring from 1,150 in 2006 to a projected 1,550 this year.

The PHBA's 2009 stakes schedule features 27 events worth a total of $2.375 million. The highlight is the Sept. 19th "Pennsylvania's Day at the Races" at Philadelphia Park, which will stage five stakes races valued at $625,000, including a new event, the $200,000 PA Horse Breeders Distaff for fillies and mares at seven furlongs. Fifteen of the PA-Bred races will be raced at Philly, six at Penn National and six at Presque Isle Down

Penn National's average daily overnight purses have been bumped up ten percent to about $140,000 per day. The track's oldest race, the 37th Pennsylvania Governor's Cup Handicap, run at five furlongs on the grass, has doubled its purse to $200,000. The idea is to attract some of the best grass sprinters in the East and Midwest and it could serve as a prep race for the Breeders' Cup Turf Sprint.

It's quite simple: purses drive the engine of this industry.

Higher purses generally result in two things: fuller fields and better quality horses. The fewer horses running in a race, the smaller the payout if you win. Pennsylvania's racetracks are now getting a good percentage of "shippers," horses coming from out of state.

Said Philadelphia Park's Sinatra: "Outside of the New York racetracks, we're the place to be right now."

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