Bloomberg News
It’s opening day of horse-racing season at Santa Anita Park in Arcadia, and the track’s new owner, Frank Stronach, isn’t in his box. Instead of enjoying the view of glistening thoroughbreds, he’s spending most of this sunny September day in a conference room with closed draperies, peering over half glasses at blueprints of a planned racetrack in his native Austria.
This work ethic helped transform Stronach from an immigrant in Canada with less than $50 in 1954 into founder and chairman of the country’s largest auto-parts maker, Magna International Inc. Magna’s Canadian shares rose 35-fold from 1991 through 1998.
Not satisfied with Magna, Stronach has become North America’s largest racehorse owner and he plans a global off-track betting network linked by phone, interactive television and the Internet.
But this latest move threatens his success, said some analysts and investors. Magna shares in the U.S. and on the Toronto Stock Exchange lost a third of their value in 1999 as investors complained that Stronach squandered $550 million of Magna cash to indulge a hobby.
While analysts value that investment at just $6 a Magna share, the company’s U.S. stock fell more than three times that amount, from $62 to $42.38, in 1999 on concern that Stronach lost his focus.
“It’s hard enough to run one business well, but if you’re trying to run four or five businesses, it becomes extremely burdensome,” said Burridge Group Chairman Richard Burridge, whose investment company last year sold its entire Magna holdings, which once totaled 2 million shares.
A separate company
Stronach was preparing last week to spin off 20 percent of Magna’s gaming venture into a separately traded company, MI Entertainment Corp. He might part with another 31 percent of MI’s common stock later this year. Demand for shares is key, because he plans to use MI stock for acquisitions to build a profitable betting network.
To some, the move into gaming looks like a repeat of the late 1980s, when shareholders criticized Stronach for not attending to business after he invested in restaurants and magazines and ran unsuccessfully for Parliament. Magna’s Canadian shares dove 82 percent in 1989 and 1990, touching 2.75 Canadian dollars ($1.89) on Dec. 31, 1990.
He eventually sold those investments, and the company improved by cutting debt, to 12.4 percent of capital from 68 percent in 1991, Prudential Securities Inc. analyst Ron Tadross said.
The company’s profit climbed at an average annual rate of 4.5 percent from fiscal 1995 through 1998, as its revenue increased at an average of 24 percent. Magna was on pace in 1999 for another year of profit growth, with revenue reaching $9.1 billion.
Stronach, 67, said he’s not concerned about the latest round of investor criticism. He’s built his career by taking on burdens, starting at age 14, when his mother marched him down to a local auto-parts shop and signed him up as an apprentice.
Eight years later, he turned down a chance to play semiprofessional soccer in Austria to emigrate to Canada, where he started Magna in a Toronto garage in 1957. He said he worked 16 hours a day, seven days a week, sleeping on a cot in the corner to save money and give himself more time at work.
Early on, he said, he learned to share profits with employees and establish semiautonomous business units. He stopped a foreman who was planning to start his own shop by making him a partner and giving him a guaranteed share of income. This incident led to a corporate constitution that sets aside 10 percent of pretax earnings at each unit for bonuses and 7 percent for research.
That plan also helped the company improve technology. Today, Magna can build entire sections of cars faster than its rivals. It’s the world’s only company, other than one of the automakers, that’s capable of assembling tens of thousands of vehicles.
Hobby becomes a business
While building Magna, Stronach was also investing in racehorses, buying his first in 1961 as a “refuge” from auto parts. He now revels in his position as owner of the largest number of racehorses in North America.
At a September breeders’ association fund raiser at his 715-acre Adena Springs farm in Midway, Ky., for example, hundreds of guests danced to the music of blues legend Ray Charles, who was accompanied by the Lexington Philharmonic Orchestra.
The land is part of Stronach’s 4,000 acres of horse farms in North America, which produced 1998 Breeders’ Cup winner Awesome Again, named for Magna’s returns. Stronach looked fit as he moved smoothly through the crowd, his athletic build maintained with 45-minute morning treadmill workouts and afternoon tennis games.
Five hundred miles north, Magna’s French chateau-style headquarters in the Toronto suburb of Aurora, decorated with marble floors, chandeliers and Impressionist art, serves as another base. Across a reflecting pool in back are three mansions one each for Stronach and his wife Elfriede, his daughter Belinda, and his son Andy along with a golf course and training facilities for racehorses.
Magna paid Stronach $17.6 million in total compensation in the fiscal year ended July 31, 1998. Stronach’s 73 percent stake in Magna was valued at $216.5 million at the end of December.
Analysts worry that Stronach is straying from auto parts at a time when Magna spends more cash, about $900 million in 1999, than it’s taking in, about $700 million, and as its return on invested capital has dropped to 13 percent from 21 percent in 1994. Stronach dismisses the concern.
“Every business goes through cycles,” he said. “I think there could come a time where the automotive business could borrow money from our entertainment company.”
Santa Anita is key
He plans to use MI Entertainment, which generated $133.6 million in revenue for the eight months ended Aug. 31, to buy and refurbish U.S. racetracks to boost attendance, adding to its six U.S. tracks and other real estate in North America and Europe. The company plans to bundle television signals from the tracks to create a well-known brand to boost profit from off-track betting.
Key to the strategy are Santa Anita and another track Stronach bought last year, Gulfstream Park in Hallandale, Fla., site of the 1999 Breeders’ Cup. The six U.S. tracks generate 30 percent about $3 billion of all off-track betting revenue on simulcast races, which are televised in betting parlors around the U.S.
Stronach thinks he can lead a revival of racetrack betting, which now accounts for as little as 5 percent of legalized gaming in the U.S., or about $14 billion annually, down from almost a monopoly in the 1940s. He claims rival track owners are too slow to adopt new marketing techniques.
“It’s kind of clubbish, ja,” he said. To revive the industry, Stronach wants to make the tracks more like Las Vegas casinos. He plans to spend $200 million to equip Santa Anita with an indoor arena for Las Vegas-style shows, a theme park, shops, and restaurants.
Horse breeders appreciate his efforts. “Racing needs a savior and Frank is as close to a savior as we’re going to get,” said Tom Bachman, owner of Pegasus Ranch in Petaluma, Calif.
The odds are against him, said Bear Stearns & Co. gaming analyst Jason Ader. He calls racing a dying sport. “Wagering consumers are fulfilling their needs elsewhere,” he said.
Stronach’s family members support the gaming plan, which is important because they help run Magna. His daughter Belinda, a Magna director, attributes Stronach’s intensity and restlessness partly to an unfilled desire to rise above his roots in Austria.
“With the high standards he’s set for himself, he’s always reviewing, always thinking,” she said.
He has held the confidence of his directors partly through a willingness to revise plans, said William Davis, a former Ontario premier and a Magna director since 1985.
“When you look at the track record,” said Davis, “you say to yourself his foresight has been rather well placed.” After all, analysts concur with Stronach’s estimate that Magna’s annual revenue will climb to $20 billion in the coming decade.
Stronach said he will be able to overcome the odds to make his business venture a success. The gaming endeavor is different from the earlier foray into magazines and restaurants, Stronach said, because “I’ve been involved in racing for over 40 years and I know every aspect of the business.”
In the end, of course, the marketplace will decide whether he’s right. For now, Magna investors aren’t betting on it.
Additional reporting by Alison Flint and Mikio Kumada in Vienna.
