Capital Gazette wins special Pulitzer Prize citation for coverage of newsroom shooting that killed five

Magna to take complete ownership of Md. tracks

The Baltimore Sun

The Canadian company that controls Maryland's major thoroughbred tracks agreed yesterday to buy the remaining interest in Pimlico Race Course and Laurel Park for $18.3 million, officially ending local stewardship of the state's storied jockey club.

Magna Entertainment Corp., a debt-laden company struggling to reverse its money-losing operations, exercised its option to acquire the outstanding 49 percent stake in the 264-year-old Maryland Jockey Club, the umbrella organization for the two racetracks and the training center in Bowie.

Magna purchased controlling interest in the Maryland tracks in 2002, along with rights to buy the remaining shares by November of this year.

Magna said the De Francis family's leadership role in managing the tracks would end after more than 20 years. But the family still stands to benefit financially if slot machines are legalized at Laurel Park and Pimlico, where the Preakness is held.

Maryland's tracks and related operations are a key contributor to Magna's financial health, contributing nearly 17 percent of the company's $697 million in racing and gambling revenue last year. But the state's horse racing industry has suffered as neighboring states have embraced slot machines and increased race purses.

Magna executives have lobbied lawmakers for slot machines at Pimlico and Laurel, and that push is expected to grow now that Gov. Martin O'Malley has indicated that he might pursue slots as one step toward closing a budget shortfall.

"While thoroughbred racing in Maryland is currently facing many difficult obstacles, we remain optimistic that with the assistance of other stakeholders, horse racing in the state can have a bright future," Frank Stronach, Magna's chairman and interim chief executive officer, said in a statement.

Joseph A. De Francis, chief executive of the Maryland Jockey Club, and his sister, Karin De Francis, an executive vice president, will give up day-to-day management of the tracks. Joseph De Francis, who also was an executive vice president of Magna, will remain a member of the company's board of directors. Other executives, including Lou Raffetto, the Jockey Club's president and chief operating officer, will remain, Magna said.

Some lawmakers said the departure of Joseph De Francis could help win approval for slots because some legislators have criticized him, saying he was focusing on personal profit instead of the racetracks' health.

Under a deal structured at the time of the initial acquisition, the De Francises and a group of former minority owners of the Jockey Club will benefit financially if slots are legalized in Maryland.

The De Francises, the minority-owners group and the Jockey Club formed a joint venture in 2002 to pursue business opportunities, including the possible development of gambling operations, according to documents filed with the Securities and Exchange Commission.

The agreement would give the De Francises and the minority-owner group 65 percent of the operation's profits from slots during the first five years, 50 percent for the next five years and 40 percent in the following decade, according to the SEC filings.

After the rejection of slots legislation in the General Assembly in recent years, O'Malley has renewed efforts to legalize slot machine gambling to help close a $1.7 billion budget shortfall.

The Maryland Jockey Club, founded in 1743, is one of the oldest names in sports. The Jockey Club holds the Preakness, the second leg of the Triple Crown, which begins each spring with the Kentucky Derby.

Frank J. De Francis and partners purchased Laurel in 1984 and Pimlico two years later. Joseph and Karin De Francis inherited the tracks when their father died in 1989.

"We've accomplished a tremendous amount," said Joseph De Francis, who said he will spend more time on raising horses. "On the other hand, there's a fairly high level of anxiety and concern about where Maryland racing is going. The last seven to eight years have been difficult because we have had to try to compete with both our hands tied behind our backs relative to Pennsylvania, Delaware and West Virginia who have had the benefit of having slots at their tracks."

Magna's purchase of the remaining stake in the Jockey Club did not surprise analysts, observers or the state's racing industry.

"Joe has not been involved in the day-to-day operations of the racetracks and stuff the horsemen have been involved in for some time," said Richard Hoffberger, president of Maryland Thoroughbred Horsemen's Association.

F. Douglas Reed, director of the University of Arizona's Race Track Industry Program, said the transfer of the Jockey Club's remaining shares is more like a formality because local ownership ended when Magna acquired its 51 percent stake.

"In my mind, from an operational, logistical and control issue, and the fact that the [buyout option] was written into it, it was done back then," Reed said.

The 2002 deal valued the Maryland Jockey Club at $117 million. Magna assumed about $30 million in debt, paid $49 million to buy out the Jockey Club's minority owners and paid $1.6 million to the De Francis siblings.

Magna also paid the De Francises $9.2 million each for the right to buy them out in the fifth year. The agreement called for an additional $18.3 million if the company exercised that option.

The purchase is being completed as the company tries to strengthen its cash-strapped operations by finding partners in its gambling and racing operations, and selling some racetracks and other properties, including land adjacent to Laurel Park. The company hopes to raise up to $700 million to pay off its debt.

Stronach said in a statement that the acquisition was accounted for in the restructuring plan that company announced this month and "reflects our intent to focus the business of [Magna] on our core strategic racetracks."

Six of Magna's biggest racetracks, including Laurel Park and Pimlico, accounted for nearly 67 percent of the company's revenue last year, according to financial documents filed with the SEC.

During the same period, Pimlico reported net income of $1.36 million, down from $3.5 million in 2005, according to financial statements submitted to the Maryland Racing Commission. Laurel reported a net loss of $3.6 million last year, compared with a loss of $41,499 in the previous year.

Magna reported a net loss of $87.4 million last year.

Magna's shares dropped 7 cents to close at $2.44 on the Nasdaq stock market yesterday.

Stephen A. Velgot, a senior analyst at Cathay Financial who does not own Magna stock, said the complete ownership transfer helps solidify Magna's plans to focus on important assets.

"The two Maryland tracks are definitely part of what Magna focused around, and they've gotten to the point where they're saying, 'Let's get rid of our marginal properties,'" Velgot said.

"They've done that already or are in the process of doing that. They'll be left with better tracks and tracks that have the possibility of getting slots. Laurel Park is a good track for the company. Pimlico is mainly important for the Preakness."

John Franzone, chairman of the Maryland Racing Commission, said, "We do have an ongoing concern with the turnover at Magna in the executive ranks and pretty severe financial difficulties. We hope the plan they're working on in restructuring their debt and selling some assets is beneficial, because it's a concern for us."

De Francis said yesterday that he is confident about the future of Pimlico and Laurel under Magna.

"Pimlico and Laurel are two of the core assets of [Magna], along with other premier tracks that will be a foundation of the company on a going-forward basis," he said.

Some lawmakers reacted to yesterday's deal by pointing to the possibility of a special session of the General Assembly to consider a slots proposal.

Senate President Thomas V. Mike Miller Jr. said De Francis' exit should clear the way for a slots proposal. The House of Delegates has long been opposed to slots, with Speaker Michael E. Busch firmly against them. With De Francis gone, Miller said, Busch should be more flexible.

Busch said Magna's decision to buy out De Francis doesn't remove significant questions about the Canadian company's management of the tracks or slots in Maryland.

The company has lost hundreds of millions of dollars in its horse racing business, and its quick sale of a Pennsylvania track after it received a slots license gave many people pause about the company's practices, Busch said.

"All those questions have to be answered about Magna, separate of whether Joe De Francis is with them or not," Busch said. "The question remains about Magna and their viability in the entertainment business."

hanah.cho@baltsun.com

Sun reporters Jennifer Skalka and Andrew A. Green contributed to this article.

The deal

What does it mean?

Operations at the two tracks are not expected to change.

Joseph A. De Francis, the Jockey Club's chief executive officer, and Karin De Francis, executive vice president, will give up management of the Maryland racing operations.

What's next?

Joseph De Francis will remain a Magna director.

De Francis family and a group of former minority owners are entitled to part of the profit from gambling ventures if slot machines are legalized in Maryland.

Timeline

The ownership history of Pimlico and Laurel Park:

Pimlico

1870: Annapolis-based Maryland Jockey Club opens track.

1904: Purchased by William R. Hammond.

1938: Purchased by Alfred G. Vanderbilt.

1952: Purchased by Ben and Herman Cohen in association with Louis Pondfeld.

1986: Purchased by Frank J. De Francis.

1989: Inherited by his son, Joseph A. De Francis, and daughter, Karin De Francis.

2002: Majority stake acquired by Magna Entertainment Corp.

2007: Magna exercises option to buy remaining stake from the De Francis family.

Laurel

1911: Opened as county fair.

1914: Purchased by James Butler of New York.

1947: Purchased by Alfred G. Vanderbilt.

1950: Purchased by Morris Schapiro of Baltimore, who named his son, John D. Schapiro, president.

1984: Purchased by Frank J. De Francis and partners.

1989: Inherited by Joseph A. DeFrancis and Karin De Francis.

2002: Majority stake acquired by Magna Entertainment Corp.

2007: Magna exercises option to buy remaining stake from the De Francis family.

[Source: Sun archives]

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
59°