Frank Stronach and his growing global Magna empire

WHEN Frank Stronach says he is optimistic that “down the line” his company can control “ten per cent of all the gambling in the world”, the queue of punters wanting to bet against him may be very short. He has a record of reaching his targets, and if he ruffles a few feathers along the way, so what.

Stronach reaches his 74th birthday in September, but he retains the energy and business enthusiasm that took him from his native Austria to Canada as a 21-year-old tool and machine engineer, and launched him into his own company three years later. At the age of 41 he was running a major automotive parts company, Magna International Inc., from which eventually sprung Magna Entertainment Corp. (MEC), now the biggest race-track owner and operator in the United States and the vehicle for his gambling ambitions.

In the States, MEC accounts for 11 racecourses, ranging from the glorious and historical Gulfstream Park, Pimlico and Santa Anita, through the unexpected Breeders’ Cup venue Lone Star Park, to the thoroughbred and quarter horse mix of Remington Park, and accompanying training centres. Then there are two television channels, a betting operation, and a one-third share in AmTote, the leading international totalisator systems provider that will soon become wholly owned by MEC; a plant making horse bedding, and various extensive real estate developments. The Magna empire was not always so big; it was bigger. With losses mounting, Stronach’s frantic purchase of race tracks in the late-1990s was balanced last year by the sale of two harness racing tracks, one in Canada, the other on the Maryland-Virginia axis.

In Europe, Stronach’s immediate influence is less obvious. Personally, the man who has a trophy room full of Eclipse Awards for owning and/or breeding such as the Preakness Stakes winner Red Bullet, Belmont Stakes winner Touch Gold, and Breeders’ Cup winners Awesome Again and his sons Ghostzapper, Perfect Sting and Macho Uno, has only recently dipped a toe into the ownership waters, with horses in training with Luca Cumani and Jeremy Noseda that were collected when he bought for the first time at Tattersalls in Newmarket in 2005.

Corporately, European interests extend to the Magna Racino, a 24-hour combination of racecourse and casino 20 miles south of Vienna that is Stronach’s gift to his Austrian birthplace, a betting website, MagnaBet, and a one-third share in a joint venture with Churchill Downs and Racing UK, the British racecourse rights exploiter and TV channel operator. That last project, set up earlier this year and operating from England as Racing World, is both new and still small, but it sets the tone – and may yet set the standard – for Magna’s global wagering ambitions. It brings together two great race-track rivals, covering most of the top venues in North America, a UK subscription-only racing channel that boasts the best of British racing, bar Ascot, and is pointed towards a European-based betting site, MagnaBet, which feeds all manner of foreign currency into the dollar-rich host-track pools.

Joe de Francis, Magna’s executive vice president and recently promoted to the main board, was at the forefront of negotiations to set up Racing World, and he is not immune to gentle ribbing about the amalgamation of ambitions between his company and Churchill Downs, which together provided most of the funding for the project. “There’s an internet term known as co-opetition, which sums up our relationship,” he says. “We’re vigorous competitors in some areas but collaborators in others. Global distribution of the racing and betting product is the key, and it’s the smart and the right thing for us to work much more closely on an international vehicle such as Racing World. We both have quality content, and that goes for Racing UK, so this is an ideal arrangement. “In addition, we have MagnaBet, the essentially German-language, European sister to XpressBet, our US-based, English-language internet betting site. They have developed side by side, but we are in the process of merging them on to one platform, which will be available globally, with technical expertise sitting in various places around the world.“We need local partners, who understand the idiosyncrasies of the local markets. That’s why it’s important to be with Racing UK, which knows the demands of British punters.”

Magna previously worked for a time with the other UK racing channel, At The Races, through TRNi, but the relationship was never a marriage made in heaven, perhaps because TRNi’s vision clashed with Stronach’s.
The arrangement with Racing UK is working well, says executive chairman Simon Bazalgette, who explains: “I think they are much more comfortable working with a racecourse group that understands how a betting path should operate. They also seemed to be impressed how Racing UK was managing our racecourses’ right in the UK, because they wanted to exploit their rights in the UK and Ireland. “Racing UK was already working with Magna because XpressBet was taking UK racing, but Racing World has strengthened our relationship, which will grow, especially now that we have 48-hour declarations in place in Britain.
“We are in the process of putting pari-mutuel links into the major UK bookmakers, which will transmit bets back to the US pools through the AmTote gateway.
“To distinguish themselves from the betting exchanges, and to help their margins, UK bookmakers are becoming more interested in the kind of exotic bets that overseas pari-mutuel operators provide. We see this as a growth area, especially when UK punters realise they can play the big carry-overs that US pools often turn up.”
Bazalgette, who expects the joint venture to take more UK racing to the States in the future, as the possible precursor to a fully global channel that would include other European racing authorities, sums up his joint venture partners: “Churchill Downs is the more corporate, more conservative organisation, but Magna is very driven and commercial, which reflects Frank Stronach’s business approach. He has shaken up North American racing, buying tracks when no-one else did.”

Magna will need to be commercial if it is to drive down ongoing losses and wipe out the minimum $500m of debts hanging round its neck. This year’s first-quarter net income of $2.2m was the first plus after seven consecutive losing quarters, but the second quarter reverted to recent type, and though revenues for the first six months of 2006 were up from $413m to $465m, compared with the same period in the previous year, costs were also up, largely due to servicing debt, from $433m to $488m. The red ink is back, and the second-quarter loss of around $26m all but matches the same period in 2005. Yet Stronach remains confident. He believes MEC could be debt free, or have very little debt, some time next year. “People may ask, ‘Why the hell are you in this kind of business, losing so much money?’” he said to investors on publication of the first-quarter results. “Well, it’s a huge business, and I’m optimistic that down the road, we have a great opportunity to be the foremost gambling and entertainment company in the world.”
Joe de Francis, a lawyer by profession, has 25 years’ experience in the horseracing business. His family controlled the Maryland Jockey Club, which owns Laurel Park and Pimlico, home of the Preakness Stakes, and he took over as chief executive in August 1989. He retains that position today, but under Magna, which bought 51 per cent of the company from de Francis and his sister in November 2002.

De Francis is well placed to view all sides of the MEC operation. “I came in at the tail end of the cycle of acquiring race tracks and at the beginning of the distribution of the racing and betting products,” he reflects. “I believe Mr Stronach when he talks about controlling ten per cent of global gambling. You can’t climb high unless you aim high. “Magna is both a race-track company and a wagering organisation. It believes strongly in vertical integration. First and foremost it owns race tracks, but to be successful in the 21st century you have to distribute your content as broadly as possible, and that’s where globalisation is important. It’s part of our mission statement. “To be successful, a race-track operator has to be involved in distribution businesses. I compare horseracing to manufacturing. We make the product and we distribute it.
“Since I came into the business, I’ve watched the evolution in distribution, from the days when you got in your car and drove to the track to bet on live racing. There was no simulcasting, very little off-track betting and no home wagering, and it was only about a dozen years ago that things began to change. “The challenges now are to select the best technology, distribution platforms and partners, so that you can take the product around the world. The challenges in North America, which centre on legislation, underscore the importance of developing systems to take the product to Europe, South America and the Pacific Rim.
“One advantage is that horseracing is extraordinarily popular, to varying degrees, around the world. The only comparison for passion and global appeal is football."

De Francis stresses that nailing down the distribution systems will be key to Magna’s success, with three pathways to be negotiated, in no particular order but together.“There’s the bet pathway,” he says. “Since our wagering is pari-mutuel, as opposed to fixed odds, we have to figure out the best way to transmit a bet from the customer to the race track, which is important because the pari-mutuel system allows the customer access to a range of betting opportunities, such as the exotics, that fixed odds cannot provide. “We are exercising our option to purchase the remaining 70 per cent of equity in AmTote, and that will give us control over one of the best companies in the global market. We are working actively with a number of the larger UK bookmakers to allow them to take pari-mutuel bets on our racing, which will enable them to offer exotic bets.”

De Francis is aware of Simon Bazalgette’s observation that UK bookmakers could get one over the betting exchanges from this channel, but he takes no side over the new betting phenomenon itself, saying: “The betting exchange business model is different from ours and it fulfils a market demand, but how we interact with them is a new issue. I don’t have a clear answer on how to work with or against them.”

However, he does have an unobscured view on the second distribution pathway – pictures, “which give the punter the ability to see the race live. People won’t bet as much if they can’t see the race, and that’s where Racing World is so important.” The third pathway involves data and information, which de Francis says is vital to give the punter everything he needs to make an informed wager. “Together they make up a three-legged stool,” he explains. “If one leg is not there, you’ll fall over. In North America we control all three, through AmTote, HRTV and Xpressbet, but in different markets it’s almost certain we will choose to partner others.”

Expansion remains on the cards for Magna, de Francis says, but while he is reluctant never to say ‘Never’, the US race-track portfolio appears to be full – with The Meadows harness racing venue almost sold – and there are no plans to extend beyond Austria’s Magna Racino in Europe.However, AmTote is steadily moving over; the New York Racing Association franchise, which is up for grabs next year, is being strenuously pursued, “with partners”, because “it’s an important part of the North American landscape and provides a very important piece of content,” and 500 slot machines are on standby for Gulfstream Park, as a forerunner of the model for other racecourse-casino sites.

Remington Park’s fortunes have already been transformed by the introduction of slots – much of the $12.5m, second-quarter revenue increase in the Magna’s southern US operations came from the introduction of the casino facility there last November - and de Francis points to improved revenues, better purses for owners and better quality racing as benefits that will flow from these and other developments in technology over the next five years. “There will be an enormous evolution in our business generally,” he forecasts. “We’re going to be in many more geographical markets, with much more content available in homes, so that people will be able to access the racing product like never before. We’re being presented with a unique set of challenges.”
 
THE MAGNA ENTERTAINMENT CORP. EMPIRE

Original parent company Magna International Inc. is a diversified automotive parts supplier, based in Canada and founded by Frank H Stronach, currently chairman and interim chief executive.
Stronach, born in Weiz, Austria, on 6 September 1932, emigrated to Canada in 1954 with a background in tool and machine engineering. He started his first tool and die company in 1957, branched out into automotive components and after a merger of companies MII was formed in 1973, and has grown into one of the world’s biggest of its kind.
Under reorganisation of the corporate structure in November 1999, the non-automotive businesses and real estates assets, including recently acquired race tracks, were transferred to Magna Entertainment Corp, which became a public company, quoted on Nasdaq and Toronto Stock Exchange in March 2000. Executive office in Aurora, Ontario, Canada, but incorporated in Delaware, USA.

RACE TRACKS

USA
Golden Gate Fields: Albany, California; acquired in Dec ’99; 105 racing days.
Great Lakes Downs: Muskegon, Michigan; acquired in Feb ’00; 120 racing days.
Gulfstream Park: Hallandale Beach, Florida; acquired Sept ’99; races during winter months.
Laurel Park: Laurel, Maryland; majority interest acquired with Pimlico Nov ’02; two near-four-month meetings at either end of year split by three-week August meeting.
Lone Star Park: Grand Prairie, Texas; acquired Oct ’02; thoroughbred racing April to mid-July, quarter horse racing October and November.
The Meadows: Pittsburgh, Pennsylvania; acquired April ’01; year-round harness racing on 210 days; in process of being sold for $200m.
Pimlico: Baltimore, Maryland; majority interest acquired with Laurel Park Nov ’02; 8-week spring meeting includes Preakness Stakes.
Portland Meadows: Portland, Oregon; operated by MEC since ’01; races from October to April.
Remington Park: Oklahoma City, Oklahoma; thoroughbred racing August to November, quarter horse racing March to June; year-round simulcasting and casino.
Santa Anita Park: Arcadia, California; two seasons, 26 December to mid-April, six-week Oak Tree meeting in autumn.
Thistledown: North Randall, Ohio; acquired in Nov ’99; races 185 days March to December.
Europe
Magna Racino (Ebreichsdorf, Austria; built April ’01; thoroughbred and harness racing from April to November; year-round gaming and entertainment.


WAGERING


XpressBet: for US-based punters only, in states where legal; launched ’02; HQ in Washington, Pennsylvania; off-track betting facilities and national account wagering business, by telephone and internet; covers pari-mutuel betting from over 100 thoroughbred, harness and quarter horse tracks in North America and races in Australia, Dubai and South Africa; offers real-time audio and video streaming; bets co-mingled with existing race track pools.
MagnaBet: European-based online, mobile phone and SMS service, for non-US customers; launched ’04; covers pari-mutuel betting on races from US, Austria, Germany and UK; offers real-time and recorded audio and video streaming; bets co-mingled with existing race track pools.

TELEVISION


HorseRacing TV (HRTV): owns and operates 24-hour network focused on horseracing; available to more than 11m cable and satellite viewers in US.
The Racetrack Television Network (RTN): one-third interest in direct-to-home, subscription telecasting service from MEC and other tracks, made available to betting shops internationally.
Racing World: one-third partner since January ’06 with Racing UK and Churchill Downs in international TV channel, currently broadcasting US racing to Britain and Ireland.

OTHERS


AmTote International: leading provider of totalisator services to international pari-mutuel industry; 30% interest bought for $3.8m in August ’03; notice given of intention to take up option on remaining 70% of equity in two stages, September and November ’06, for total of $14m.
Thoroughbred training centres: San Diego, California; Palm Beach County, Florida; Baltimore, Maryland.
Production facilities: for Streu-Fex, straw-based, horse bedding product, in North Carolina and Austria.
Real estate: two golf courses (in Austria and Canada) and related recreational facilities; residential developments in US, Austria and Canada.
Employs 5,300 through the group.

PARIMAX


Holding company formed in February ’06 to oversee development of XpressBet, HRTV, RaceONTV, Magnabet, AmTote, Racing World and PremiereWin (TV partner in central Europe).