Passion saps profit

Magna Entertainment's founder has a vision for racing, fogged by failures

Sun Special Report

January 13, 2008|By Hanah Cho | Hanah Cho,Sun reporter

The Horse Wizard was a hybrid of a slot machine and a live race telecast, in which images of horses instead of cherries spun on the screen. Win, and listen to the sound effects of coins dropping.

It was Frank Stronach's pet project. To the founder of Magna Entertainment Corp., the Horse Wizard took the thinking out of betting, while offering the excitement and instant gratification of casino gambling to a new generation of patrons.

But if Stronach expected others around him to embrace his enthusiasm, he didn't hear it. "I remember sitting there, and he had some test ones, and I tried them and said, `This is really bad, Frank,'" recalled Gino Roncelli, a former Magna director."`

Oh no, they're going to get used to this. This is going to be great,'" Roncelli remembered Stronach saying. "I said, `Frank, this is a terrible loser.'"

Undeterred, Stronach authorized spending $15 million to $20 million to build and install Horse Wizards at Magna's major thoroughbred tracks. At Laurel Park, officials built a new room with flat-screen TVs, faux-velvet ropes and nightclub lighting to hold 36 of the slot-machine lookalikes.

But the device had little of the appeal of either slots or live wagering. The result: Virtually no one played. Less than a year after the VIP debut party in January 2005, Laurel shut the Horse Wizard lounge. The machines still sit in the roped-off room.

The Horse Wizard was, in microcosm, the story of Magna Entertainment under Stronach. Fueled by the auto-parts magnate's passion for horse racing, Magna's eight-year run as a public company has been marked by autocracy and misplaced risks that have disappointed even some of Stronach's allies in the fight to save horse racing, according to more than a dozen interviews with people in the industry and a review of thousands of pages of federal and state financial filings.

And his management acumen could have an even greater impact on the future of Maryland's racing industry, if voters pass a slots referendum in November.

Magna has lost more than $400 million since 2002 and survives on infusions from Stronach personally and his other businesses, filings with the Securities and Exchange Commission show.

It has had five CEOs in eight years - not including Stronach's three stints as interim CEO - and equally rapid turnover in track management. Most of Magna's tracks lose money - one exception being Baltimore's Pimlico Race Course, though its profit is entirely from the Preakness Stakes, the middle leg of racing's Triple Crown.

The company has yet to see payoff from hundreds of millions of dollars invested to develop casino complexes around its racetracks. On Dec. 28, Magna shares closed under $1 for the first time.

The November referendum could determine whether Magna can install slot machines at Laurel Park. Magna and Maryland horsemen contend that revenue from slots is, as Magna director Joseph A. De Francis put it, "absolutely essential to the viability and survival of the horse industry in Maryland."

But Magna has been unable to make money even with slots at its two U.S. racetracks that have them, financial filings show. Some Maryland political leaders have questioned whether Stronach's company is fit to hold a slots license if the referendum passes.

Nationally, the horse racing industry has seen a steady decline in live attendance, handle and race purses, and it is facing stiff competition from newer gambling attractions such as Indian casinos. Still, Magna's closest competitor, Churchill Downs Inc. of Louisville, Ky., made a profit of $29.8 million on revenues of $376.7 million in 2006, and all but one of its major tracks showed operating profits.

Stronach did not respond to repeated interview requests by phone, e-mail and letter. De Francis, who sold his family's remaining stake in Laurel and Pimlico to Magna in September and stepped down as a Magna executive, said the company has learned from its mistakes and would operate a profitable gambling business in Maryland.

John Franzone, chairman of the Maryland Racing Commission, says many of Magna's problems stem from poor management - a problem that he says goes to the top. "After so many managers [who have come and gone], you have to look in the mirror and say, `Why did this keep happening?' " he says.

Entrepreneur

In 1957, three years after emigrating from Austria with only a few hundred dollars, Frank Stronach started a tool-and-die shop that, over the ensuing decades, grew into one of Canada's great entrepreneurial successes. His Aurora, Ontario-based Magna International is now a $24 billion global auto-parts empire.

As he built one of Canada's largest fortunes, Stronach also became one of the top breeders and owners in thoroughbred racing. He has won almost every major award in the business and has amassed countless wins in big races, including four Breeders' Cup races and the 2000 Preakness with Red Bullet.

But he wanted to own more than horses.

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