Horse Racing Seems Headed for Far Turn

There are about 100 thoroughbred racetracks in the U.S., but the linchpins of a long-troubled sport are three companies that own 20 of them.

Those companies -- Churchill Downs Inc. in Louisville, Ky., Magna Entertainment Inc. in suburban Toronto, and the New York Racing Assn. -- might have a corner on the industry, but they also bear the burden of racing’s mountain of problems.

* Churchill is feuding with the Jockeys’ Guild, whose members ride most of the races.

* Debt-ridden Magna recently replaced its chief executive -- again.

* The New York tracks have been tarnished by a federal indictment against an organized-crime family with links to horsemen.

In December, at a racing conclave at the University of Arizona, Tom Meeker, chief executive of Churchill Downs Inc., discarded a prepared speech and launched into what was essentially a pep talk for the industry.

“You need a passion for this game,” Meeker said. “The passion I’m talking about is the kind it takes to walk out the door 365 days a year, committed to solving a problem. I’m sick and tired of walking away from these meetings and not being 100% satisfied with the way we’ve solved problems.”

Racing, racked by empty seats and competition from other forms of gambling, is struggling because its strongest links are not that strong.

Churchill Downs, whose flagship track will run the Kentucky Derby for the 131st time May 7, could use a pep talk of its own. Churchill began the winter on a high note, buying the Fair Grounds track in New Orleans for $47 million, but its annual earnings report, released on March 16, included some dim news. Net income for 2004 was $8.9 million, compared with $23.4 million for the year before.

“We’ve got a number of challenges in 2005,” Meeker said.

Frank Stronach’s grand plan for Magna Entertainment has been derailed by three years’ worth of red ink. The head that rolled in March belonged to Stronach’s long-time ally, Jim McAlpine, who was replaced by Thomas Hodgson, the fifth chief executive since Stronach launched Magna with the $126-million purchase of Santa Anita in December of 1998.

“This is the classic example of a young company with ambitious goals for future growth,” said McAlpine, who has taken a lesser role with Magna. “Despite our enthusiasm for the future, and the belief that our long-term goals are appropriate, we recognize that we cannot continue to strain our current limited resources with costs related to initiatives providing no significant current revenue.”

Magna reported losses of $95 million last year, bringing its deficit to $215 million since 2002. The company’s long-term debt is $241 million.

At the New York Racing Assn., which runs Belmont Park and Aqueduct in the New York City area and Saratoga, a track that dates to the Civil War, in upstate New York, there was another top-level management change late last year with the hiring of Charlie Hayward, former president of the Daily Racing Form. Hayward has been trying to put out fires ever since, and he soon will be at the forefront of a battle to renew NYRA’s wobbly franchise.

Horse racing has a commissioner -- D.G. Van Clief of the National Thoroughbred Racing Assn. -- but in practice he is no more than an unofficial baby-sitter, empowered over no one. Because racing is state-regulated, the politically appointed racing commissions, not Van Clief, govern the tracks.

Churchill and Magna, public companies, and the not-for-profit NYRA all operate under this system, controlling roughly half of the horse betting in the U.S. In varying degrees, Magna and Churchill, which are intense rivals, covet the New York tracks.

“We would like to be a major player in New York,” Stronach said. NYRA, which has operated the hugely successful Saratoga and the now-declining Belmont and Aqueduct since 1955, has a state-issued license that expires at the end of 2007. From 2001 through 2003, NYRA’s operating losses topped $53 million. Those who have taken cracks at running the place include veteran racetrackers Kenny Noe Jr. and Terry Meyocks, and Barry Schwartz, an experienced owner-breeder, a savvy horseplayer and one of the founders of the Calvin Klein clothing empire.

Noe was a throwback, a crusty racing lifer known to fire people in elevators. Meyocks, Noe’s protege, may have been overmatched in trying to sort out the mess that his mentor left behind, and Schwartz, who seemed to be the complete package and even worked without salary, threw up his hands in frustration last year.

Hayward, brought out of retirement, was welcomed by recent charges, by the New York state comptroller, that NYRA executives had padded expense accounts and the company had understated tax liabilities since 2002.

The shoe that dropped after that was a clodhopper: In late January, an 88-count indictment was filed against a group of gamblers who allegedly had been doing business with trainer Greg Martin, son of a Hall of Fame horseman. Mentioned in the indictment were several off-shore betting outlets with which NYRA was doing business. Eventually, NYRA quit sending its racing simulcast signal to those racebooks.

“To give you an idea,” Hayward said, “they accounted for 12% of our total business. Ten off-shores were doing $50 million worth of business at Saratoga alone last year. That’s a lot of handle, but they took back $51 million. Their customers were using data ports and computers to plug into the system. They were betting with an unfair advantage.”

In recent years, there have been suspicions by horseplayers that some bettors were able to place bets after races had started. Fueling the possibility were dramatic odds shifts after horses left the gate.

Churchill Downs’ Meeker says that NYRA has been operating for years with a “business model that’s not very good.”

Hayward can’t deny the characterization.

“NYRA has been a bastion of the industry, the place where great horses have been running in the great races, but it’s also been an institution of arrogance,” he said. “On the racing side, NYRA has been great; on the business side, it’s been terrible.”

New York’s governor, George Pataki, has floated the idea of public bidding for the NYRA license when it expires. One plan suggested a $250-million franchise fee, a 10-year license and an annual operating fee.

In palmier days, Magna’s Stronach would have written a check and picked up the keys to Belmont Park. But this is not 1999 at Magna. And the opportunity to install video lottery terminals at Aqueduct casts a slightly rosier hue on New York’s racing landscape.

“One of the factors in this is that no matter what would happen to the license, NYRA owns the land,” Hayward said. “It also owns the names to the sport’s greatest races, such as the Belmont Stakes and the Travers at Saratoga. There needs to be clarity in this area.”

Just when the newly arrived Hayward, inheriting a company that was already under a federal monitor because of a tax-fraud scandal involving mutuel clerks, might have wondered if he had any friends at all, up popped Friends of New York Racing, a group that might be best described as a public-policy think tank.

Started by Tim Smith, former commissioner of the National Thoroughbred Racing Assn., FNYR is multifaceted and, for some, an endeavor hard to fathom.

Smith reportedly turned down the NYRA’s head job before Hayward was hired. For FNYR, Smith has attracted the support of a cross-section of industry leaders, including Sherwood Chillingworth of the Oak Tree Racing Assn., which races at Santa Anita. FNYR’s charter board, a truly eclectic mix, also includes a representative from Magna, which prompts the question: How can you want to take over someone’s business and be a “friend” at the same time?

The New York Daily News says it’s time to turn out the lights on NYRA.

“NYRA is a failed institution,” the newspaper said in a recent editorial. “[It is] corrupt, criminal, bankrupt, incompetent and a growing drain on the taxpayers. The state’s racing industry has suffered under its stewardship and will fall only further as bettors, fairly, begin worrying that they are in the hands of Mafia capos. It’s time for Gov. Pataki and the Legislature to put [the three tracks] under new management.”

Unlike the NYRA’s real estate, the land at Hollywood Park in Inglewood is Churchill Downs Inc.’s, free and clear, and the track has been reported up for sale. Churchill, which owns six tracks, bought Hollywood for $140 million in 1999 and may be able to at least double that amount by selling, the land valuable for commercial development.

Whether Churchill Downs would race the state-granted Hollywood Park dates elsewhere is subject to speculation. Ed Allred, who owns Los Alamitos, a quarter horse track in Orange County, is interested, with a partner, prominent horse owner Mike Pegram, in adding thoroughbred dates to his schedule. Pegram, who made his money in fast-food restaurants, says he is willing to spend $40 million to convert Los Alamitos to a thoroughbred operation.

Magna’s Santa Anita also would be interested in racing Hollywood’s dates under a lease arrangement. None of the racing entities, however, including Hollywood Park, is entitled to the dates without the approval of the governor-appointed California Horse Racing Board.

Without slot machines, which would enable it to compete with Indian gaming, Churchill Downs is pessimistic about the future of racing in California. Last year, Churchill spent $6 million lobbying for slots in California and Florida, for all tracks in California and for the Churchill-owned Calder Race Course in Miami-Dade County, Fla. The referendums failed on both fronts.

“California is very troublesome for our company,” said Meeker, who declined to comment about a possible sale of Hollywood Park.

“The business environment in California is very problematic. The workers’ compensation expenses for the horsemen are a burden. The Indian casinos are all over the place. We took major hits last year on our attempts to get alternative gaming approved. The governor made sure that didn’t happen, and the Indians were able to outspend us by a wide margin in defeating the referendums. We’ve got huge amounts of capital invested in California racing, and we’d like to do better.”

Richard Shapiro, a member of California’s racing board and chairman of its powerful racing-dates committee, is not as enthusiastic about slot machines as most track operators are.

“When tracks talk about slots, it’s as though they’re looking for a handout,” Shapiro said recently at a racing conference in Indian Wells. “Track operators are looking to be supplemented by another form of gambling. I don’t buy it. They’re looking for a handout, while all of racing’s problems -- small fields of horses, etc. -- go unaddressed. Racing looks ugly today, and most of our energies should be spent on solving that problem.”

Magna, which owns 11 thoroughbred tracks, is trying to boost its cash flow, probably so it can make a run at the NYRA’s franchise by 2007. Stronach’s company sold racetrack land in Michigan for $4 million and recently let its greyhound-track license lapse in Portland, leaving Oregon without dog racing for the first time in 71 years. More sell-offs and belt-tightening are inevitable.

“Our priorities are to sell business units that don’t contribute positive cash flow,” Magna’s McAlpine said. “We will try to find strategic partners with capital to support our growth.”

Even so, McAlpine was said to be less willing than Stronach to take in partners at Magna, whose parent company, Magna International, specializes in auto parts and employs 81,000.

Magna owns Pimlico, the Baltimore track that is home to the Preakness, the middle leg of the Triple Crown series, but its bell cows are Santa Anita and Gulfstream Park in Hallandale Beach, Fla. Both are struggling this winter.

At Gulfstream, which runs the Florida Derby, one of the major preps for the Kentucky Derby, business this season has shown double-digit declines in the face of a $145-million remodeling job. Fans have been trying to keep up with the horses at Gulfstream from a tent city.

“We knew business would slack off while we rebuild,” Stronach said. “But we had no choice, the show had to go on.”

Regarding slot machines, Magna succeeded where Churchill Downs failed in Florida. On March 8, voters in Broward County, where Gulfstream sits, approved slots for that track, as well as a greyhound track, a harness track and a jai alai fronton.

Meeker said that Churchill and Calder would continue to pursue slots in neighboring Miami-Dade County, but there can’t be another vote until 2007.

Santa Anita has been hit by near-record rainfall this season. And typical of Magna companies, there have been wholesale personnel changes. Its marketing director was let go a couple of days before the meet opened and Chris McCarron, the retired Hall of Fame jockey, resigned as general manager.

“There is an upheaval in the industry in California,” McAlpine said. “We’re hoping that changes in management at Santa Anita will bring new focus.”

One of the additions is Ron Charles, a printing executive and horse owner who was hired in November to oversee Santa Anita and its sister track in California, Golden Gate Fields.

“We’re excited about having Ron Charles on board,” Stronach said. “We hope he makes a great contribution.”

This time of year, it’s easier for Churchill Downs’ Meeker to talk about his home track, which is just weeks away from another Kentucky Derby. Meeker, a 61-year-old lawyer, is a demanding ex-Marine who has been at Churchill since 1984. The Louisville track is just finishing up a renovation program that cost $121 million. To help pay that bill, Churchill sold personal seat licenses -- a revenue ploy familiar to many National Football League season-ticket holders. The one-time licenses, entitling purchasers to buy Derby seats for the next 30 years, went for $3,000 to $9,375 a seat.

“It was a program that was very well-received,” Meeker said. “People were glad to know they’d be assured of seats over the long haul. We raised $20 million.

“I even bought some licenses myself. I want to make sure my family’s taken care of, after they throw me out of this job.”