Source: Dow Jones Business Wire
 
Canadian mogul and Magna Entertainment Corp. founder Frank Stronach is poised to maintain control of many of the racetrack operator's most valuable assets, under a Chapter 11 plan that received the bankruptcy court's favor Monday.
 
Judge Mary F. Walrath of the U.S. Bankruptcy Court in Wilmington, Del., indicated she would sign off on the reorganization proposal, provided Magna tweaks some liability releases included in the plan.
 
She affirmed that a settlement between Magna's unsecured creditors and its largest shareholder and lender, MI Developments Inc. (MIM, MIM.A.T) was appropriate, despite claims by a group of minority equity holders that MI Developments was scoring a windfall at the expense of creditors.
 
"I don't think [MI Developments] is getting any trophies here, any more than what it's giving up," Walrath said, estimating that MI Developments is providing some $710 million to $750 million in value in exchange for assets worth far less in today's market.
 
Under the settlement, first introduced in January, the Stronach-controlled MI Developments will funnel enough cash into the bankruptcy estate to afford the unsecured creditors a 40% to 50% recovery on some $250 million in claims, in exchange for assets like Pimlico Race Course in Maryland and Santa Anita Park in California.
 
Over three days of confirmation hearings, Magna insisted that its decision to pull some of its most valuable racetracks from the auction block and instead fold them into the deal with MI Developments was the best path to reorganization for the company and its creditors.
 
"There is no white knight here, your honor," Brian Rosen, a Weil, Gotshal & Manges LLP attorney representing Magna, told the judge Monday. "There is no one to buy the assets, there is no one to finance them past April 30."
 
Professionals who helped Magna with its sale and plan process last week took the stand, recounting their uphill--and now abandoned--fight to sell certain racetracks.
 
"We simply could not get them ultimately to the finish line," Marc Puntus, an investment banker for Magna, said Thursday of bidders initially interested in the Maryland assets.
 
Potential buyers lacked the financing or desire to pick up properties being hit by a one-two financial punch: a shrinking industry and anti-gaming legislature that jeopardizes the slot-machine proceeds racetrack operators crave, Puntus said. As a result, his firm, Miller Buckfire, had little luck selling most of the racetracks, he said.
 
But some minority equity holders, who are forecast to go home empty-handed, argued that the company was simply gifting the properties to MI Developments. They believe the company is worth much more than Magna acknowledges in its plan, pointing to prime real-estate like the grounds of Santa Anita, plus the potential for gaming proceeds, as sources of additional value.
 
The professionals hired by Magna and the unsecured creditors committee acknowledged that some earlier appraisals of the company's properties had indicated greater value than what MI Developments is paying. But they said that their attempts to test the market by placing the racetracks on the block indicate that the appraisals don't reflect the price Magna would be able to fetch at auction.
 
"The perception of value turned out to be different than the reality of value, at least at the current time," Puntus said. He said the total value of the tracks doesn't cover Magna's $560 million in secured debt, let alone the $870 million in total debt the company is carrying.
 
Nicholas Leone, the financial adviser for the unsecured creditors, also stressed that the prestige, history and appearance of the racetracks--which host premier races like the Preakness and the Breeder's Cup--doesn't automatically lead to high bids.
 
"I think you need to draw a distinction between saying, 'these are beautiful tier 1 properties' versus 'how valuable are they as an asset to a third party?'" said Leone, who is with Blackstone Advisory Services LP.
 
Magna has been able to sell some of its racetracks, including Thistledown Race Track and Lone Star Park. But the advisors warned that even some of those transactions--approved by the court months ago--are now in jeopardy. New questions about the future of gaming in Ohio, thanks to an upcoming referendum on slot machines and the advent of land-based casinos, have given would-be Thistledown purchaser Harrah's Entertainment Inc. an out from its contract with Magna. Puntus said he expects Harrah's to either negotiate a lower purchase price or abandon the deal altogether.
 
Magna, based in Ontario, Canada, sought bankruptcy protection on March 5, 2009. Rosen, the attorney for the company, said he expects it to officially emerge from bankruptcy on April 30 or May 1.