Horse Sense Or Horsefeathers?

It doesn't get any better than the Breeders' Cup for fans of Thoroughbred racing. More than 66,000 crowded into Louisville's Churchill Downs on a cold Saturday early in November for the Super Bowl of horse racing, a slate of seven races, each offering a purse of at least $1 million. Attracted by the likes of 2-year-old speedster Arazi, whose win in the Juvenile made him the winter-book favorite for 1992's Kentucky Derby, bettors at Churchill and at offtrack sites throughout North America wagered a record $67.6 million. Recession be damned -- that's a stunning 22% increase from the 1990 Breeders' Cup total. The wagering was inflated by a lottery-like, high-payoff Pick 7 bet that Churchill was trying for the first time, so the one-day numbers hardly represent a trend. But an optimistic group of contrarians believes the Breeders' Cup success and a firming of prices at recent horse auctions may mean the Thoroughbred market is touching bottom. "This will be a leaner but stronger industry in five years," says Christopher Scherf, executive vice-president of Thoroughbred Racing Assns., which represents 55 tracks.

Leaner no doubt, but not without a good deal of pain. Caught in a cost squeeze, a dozen or more racetracks have closed or are expected to halt live racing in the near future. Prices breeders get for top yearling racing prospects are down to nearly 50% from the 1984 peak (chart). And stud fees commanded by the top stallions have fallen from around $400,000 per breeding season four years ago to $225,000 today.

No wonder this year's Thoroughbred foal crop will be the smallest in more than 10 years. "Breeding got out of control," says University of Louisville economics professor Robert G. Lawrence. Simply put, too many marginal mares were bred to nondescript stallions during the go-go '80s. Now, says Lawrence, "a lot of their offspring are going nowhere but into a can." A dog food can, to be precise.

Harshly put, but true. And it's just the kind of story Carl C. Icahn likes to hear. The New York financier is one of the more prominent contrarians betting big bucks that the bottom may be near. Others include billionaire John W. Kluge, rap star Hammer (formerly M. C. Hammer), and Campbell Soup Co. heiress Charlotte C. Weber. "To me, it's like when junk bonds got too cheap," says Icahn. "I like to buy things when people are throwing them at you."

The argument for a turnaround goes like this: There no doubt will be fewer races, but better-quality horses will be running in them for higher purses. Horse owners in 1990 collected $710 million in purses, up 71% from a decade earlier (chart). The payoff promises to grow even more as the industry turns to simulcasting -- closed-circuit race telecasts beamed from one track to others around the country. More simulcasting means bigger betting handles and fatter purses, which equal about 8% of all dollars bet. And the bulk of those fatter purses are going to winners of stakes races, the sport's high end. Next may come national betting pools.

FEVERISH SHEIKS. After they add all that up in the margin of The Daily Racing Form, contrarians conclude that the free-fall in horse prices is near an end. "I'm seeing signs of stability for the first time since the mid-80s," says Russell B. Jones Jr., a Pennsylvania horseman who heads Metromedia Chairman Kluge's Morven Stud farm in Virginia.

If Kluge makes money racing Thoroughbreds, he'll be an exception. Horse experts say that it costs a minimum of $15,000 per year to cover the overhead of training and boarding a racehorse. But 1990 Jockey Club statistics show that 86% of the 89,722 Thoroughbreds that raced that year earned less than that amount in purse winnings. Worse, 14,321 horses didn't earn a dime.

Pure economics mattered little in the fevered horse market of the late 1970s and early 1980s. That's when Sheik Mohammed al Maktoum and his three brothers, who collectively rule Dubai, began their U. S. buying spree. Many breeders acted as if the Maktoums and other high rollers would keep bidding up prices forever. When the big buyers pulled out of the market or slashed their spending, the breeders got scorched.

The Maktoums still account for about 40% of the spending at the top auctions, but Anthony Stroud, racing manager for Sheik Mohammed, says his employer has developed restraint. "If horses are overpriced, we won't buy them," he says.

That newfound caution wasn't in evidence when Maktoum paid Allen E. Paulson, chairman and chief executive officer of Gulfstream Aerospace Corp., a breathtaking $10 million for a 50% stake in Arazi before the colt won the Juvenile on Nov. 2. Paulson cites that sale and his purse winnings to refute charges that he overpaid in building his $150 million breeding and racing operation, headquartered at Brookside Farms in Versailles, Ky. "I'm doing better than a 10% return on capital this year," he says.

BAD BUY. Icahn, too, insists that his Foxfield Farms, also in Versailles, is profitable. He entered the business in 1985, teaming with breeder Peter M. Brant to pay a record $7 million for the mare Miss Oceana. Bad mistake: That sale marked the peak in mare prices. Icahn says he now buys only bargain high-end mares and he has enough brood mares to turn out 40 to 50 yearlings per year, selling for $50,000 to $250,000 each. "This is strictly a money-making business for me," he says.

In the end, the health of the Thoroughbred industry will depend on boosting the betting handle. It now tops $9.2 billion a year nationwide, but it's growing more slowly than other forms of wagering, especially casino gaming. That's why Churchill Downs President Thomas H. Meeker and others are lobbying for a national version of the Pick 7 bet that sparked the surge in wagering at this year's Breeders' Cup. Bettors in 29 states laid down $8.5 million on the Pick 7. No one selected the winners of all seven races, but 29 bettors in four states did get six right and took home about $225,000 each for a $2 wager.

An industry committee is now considering a national Pick 6 wager. It could involve a weekly, hour-long syndicated TV show featuring six big races from tracks across the U. S. Racing purists disdain the plan as nothing more than a national lottery. But if such a wager can generate handles as high as the one at the Breeders' Cup, contrarians could prove to be correct even faster than they imagined. Of course, the pessimists still greatly outnumber the optimists, but, hey, that's what makes horseraces.

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