The Horse Track Industry's Hot Favorites
A longtime racing enthusiast with more than 800 horses and several major trophies in his stable, Canadian auto parts magnate Frank Stronach decided he wanted an even bigger piece of the action. In 1998, Stronach plunked down $118 million for Santa Anita Park, one of the prettiest and most prestigious racetracks in the U.S. The acquisition reverberated through the clubby world of horse racing. Before long, in a race to consolidate the $14.5 billion U.S. horse track industry, Stronach's Magna Entertainment (MIEC ) was galloping alongside the venerable Churchill Downs (CHDN ).
Between them, Magna and Churchill now account for half the betting on horse racing in the U.S. Attendance at live racing events has been declining for years, but the companies are competing for a different trophy: the continued expansion of horse racing into casinos, off-track betting facilities, and, ultimately, the home via the telephone, Internet, and interactive cable TV systems. "I see racetracks as like a soft casino," Stronach told BusinessWeek Online. "I want to get them in living rooms around the world."
Although Magna and Churchill have their eyes on the same prize, the companies have different approaches, say industry insiders. Magna has been the more aggressive of the two, bidding as much as 14 times cash flow for top tracks like Florida's Gulfstream Park. Stronach sees racetracks as a real estate investment as well as a gambling play. He hopes to develop shopping centers and other entertainment facilities next to his tracks. "As much as I like horses, I get bored," Stronach says. "I'd like to go get my haircut or go shopping. It should be family entertainment."
Stronach's Magna has bought 11 tracks in the past four years. In April, it raised $143 million in a secondary stock offering. And the company is reportedly negotiating to acquire the Maryland Jockey Club, whose two tracks include the Pimlico Race Course, home of the Preakness. According to the Baltimore Sun, Churchill Downs had discussions earlier this year with the Jockey Club, but the talks broke down over the ongoing role of the Jockey Club's principal owner, Joe De Francis. A Jockey Club spokesperson declined to comment.
As befitting its august history, Churchill Downs is considered the more conservative of the two companies. Since 1984, Churchill has been run by its former general counsel, Thomas H. Meeker, an ex-Marine Corps officer and Vietnam veteran who gets credit for vastly improving the facilities at the company's namesake track in Louisville. Churchill now has six tracks. Meeker, say industry experts, is keenly focused on developing Churchill Downs as a brand whose racing programming can be distributed anywhere.
The benefits of consolidation are evident in Churchill's simulcast strategy. More than 80% of horse wagering occurs at locations other than the parks where the races take place. Churchill has been a leader in packaging the simulcasts from its six tracks in ways that increase its share of the betting and profits. Racetracks used to get a standard 3% cut of the betting on races simulcast to other locations. Churchill's chief financial officer, Robert L. Decker, says his company is now able to negotiate percentages as high as 4%.
"AGGREGATION OF CONTENT."
The company is also able to package more races from lesser-known tracks like Kentucky's Ellis Park and Indiana's Hoosier Park, along with racing from Churchill Downs and Chicago's Arlington Park. All are Churchill Downs tracks. "The aggregation of content, that's what drives consolidation," Decker says. "It's not live racing."
Donald Barberino, vice-president of marketing at Connecticut's Off Track Betting parlors, says Churchill has taken an aggressive role in marketing its simulcasts to the general public. Last December, Churchill raffled off a free trip to the Kentucky Derby to customers in Connecticut who came to the parlors to bet on races simulcast from Churchill's Hollywood Park track, near Los Angeles, and Calder Race Course, in Florida. "It raised the profile of those race tracks," Barberino says.
Magna and Churchill also have different approaches to what many consider the next frontier, betting from home. Churchill has partnered with TVG, a subsidiary of Gemstar-TV Guide International that has spent more than $100 million developing ESPN-like programming, now available through cable-TV systems in Kentucky, Maryland, and parts of Los Angeles, as well as through Echostar's Dish network. TVG, which also takes bets over the phone and the Net, has partnered with another company, Youbet.com, which offers Internet and phone wagering in 39 states.
Magna, for now, is going it alone. It has launched its own online betting site, XpressBet.com, and invested in the Racing Television Network, a private satellite network that charges serious racing fans $249 for a specialized receiver and $99 a month for up to eight channels of live races.
Despite these investments, Churchill and Magna have been able to increase revenues and profits over the past few years as they acquire new tracks and grab a bigger share of the nation's horse racing dollar. Churchill last year earned $22 million on revenues of $427 million. Magna earned $13 million on sales of $519 million.
Neither company's performance has gone unnoticed on Wall Street. Their shares have each nearly doubled over the past two years, and now trade at rich multiples of earnings -- proof of an old Las Vegas saying: It's better to own the casino than bet in it.
Edited by Beth Belton