Frank Stronach, Pimlico's owner and a successful breeder, wants to bring horse ownership to the masses — by selling stock in six new racehorse investment companies.
For $10 a share, investors could own a piece of thoroughbreds that would be trained and raced around the country before they are sold off, according to documents filed for the initial public stock offerings. The companies — named after Stronach's winning horses, including 2000 Preakness champ Red Bullet — are trying to raise a total of about $24 million.
The IPOs are an unusual twist on private racing partnerships, in which small groups of investors might put up tens of thousands of dollars or more for upfront costs and continuing expenses. Last year's Kentucky Derby winner, Animal Kingdom, is owned by such a partnership. However, the National Thoroughbred Racing Association was unaware of any similar public venture involving large-scale racehorse ownership.
Industry experts — and the prospectuses themselves — caution that sinking money into racehorses is risky.
Dogwood Farms president Cot Campbell, who is credited as the founder of racing partnerships, said: "It's like drilling for oil. If you drill 20 wells, 18 may be dry holes."
The prospectuses for the public offerings — a short-term investment lasting all of two years — make it clear that "the most frequent financial outcome from ownership of a thoroughbred racehorse or an equity interest in a thoroughbred racehorse is the partial or total loss of invested capital."
Timonium-based financial adviser David Berman said it would be a stretch to call the public offering an investment. He characterized the Stronach proposal as something between the Green Bay Packers' recent stock offering, in which the shares have little value because they carry many restrictions, and a venture capital investment.
Stock in Stronach's companies would not be traded on any exchange.
"Even if you assume the idea works in this case, assuming that one of the 20 horses is a winner, you are still a long way from getting a return on your money," Berman said.
Still, supporters say the IPOs could attract more people to a struggling industry that has seen a decline in wagering as fans flock to other forms of gambling such as slot machines and online betting.
"It's a creative idea that could be good for the sport," said Terry Finley, president of West Point Thoroughbreds in Mount Laurel, N.J., which manages racing partnerships. "More people will be researching horse-racing ownership online and learning about thoroughbred racing."
Stronach has had a mixed record in the racing industry.
His breeding operation, Adena Springs in Kentucky, was the leading North American breeder in 2011 for the ninth consecutive year, with its horses earning more than $14.6 million, according to Blood-Horse, an industry trade publication. Stronach has won numerous awards, including the industry's top honor, the Eclipse Award, most recently this year. His horses have won many major races, including several Breeders' Cups.
But his Magna Entertainment Corp., a publicly traded company that owned and operated racetracks in the United States, including Laurel Park and Pimlico, filed for bankruptcy in 2009.
Through several complicated maneuvers, Stronach now owns other tracks as well, including Gulfstream Park in Florida and Santa Anita Park in Southern California, under the privately held Stronach Group.
In Maryland, Stronach has angered horsemen, breeders and other industry stakeholders with his unsuccessful attempts to significantly cut the number of live racing days during the past two years.
Others blame the auto parts magnate for Laurel Park's losing out on a slots license because Magna failed to pay the license fee. And collectively, Laurel and Pimlico, the home of the Preakness Stakes, have been losing money for years.
Except for the names of the corporations involved in Stronach's IPOs, the details of each operation are virtually identical.
The prospectuses also identify conflicts of interests associated with the business.
Stronach, who is listed as chairman for each company, controls or owns the entities involved in the operations — from the company that bought the horses to the management group that will oversee their training to the breeding farm that would be hired to provide day-to-day care. The same officers and directors, some of whom have jobs with Stronach's other companies or other breeding operations, would manage all six companies.
Each corporation has acquired 20 thoroughbred horses from Alpen House, which bought the animals as yearlings at auction. Alpen House is controlled by Stronach.
Besides Alpen House, other entities involved in the business have ties to Stronach, according to the prospectuses.
Golden Pegasus Racing, which is controlled by Stronach, has been hired as the management company to oversee the business. Golden Pegasus, in turn, plans to hire Adena Springs, the Kentucky breeding farm owned by Stronach, for the day-to-day care and training of the horses.
Money from the stock sale will go toward repaying Alpen House for the purchase of the horses. It will also be used to pay the training and maintenance fee to Golden Pegasus; for legal, accounting and other administrative costs; and as working capital.
For instance, Awesome Again Racing would owe $1.2 million to Alpen House and would pay a training and maintenance fee of about $2.3 million to Golden Pegasus, according to its prospectus.
Each racing company plans to raise revenue by racing its horses until November 2013 and then by selling them. After the sale, the net proceeds would be distributed to shareholders.
Michael Rogers, Golden Pegasus' chief executive officer, who is also affiliated with Alpen House, declined to comment on the IPO. Michael Pilmer, the Stronach Group's executive vice president of operations, referred a reporter to the prospectuses for details.
Companies planning to go public usually refrain from comments because federal regulators require a quiet period before an offering.
Timothy Capps, a former Maryland Jockey Club official who is director of the University of Louisville's Equine Industry Program, said one potential conflict of interest that the prospectuses do not appear to address is the prior ownership of the horses purchased for the six companies.
Capps said he would like to know whether any of the horses came from Stronach's breeding operations. "To me, that is the fundamental thing … to know," he said.
Alpen House's thoroughbred selection team purchased the horses at auctions last year, according to the prospectuses. Documents list each horse's bloodline but do not specify a previous owner.
As an investor, Capps said, he also would like to know how the corporations would meet the regulations in states where they plan to race their horses, which includes Maryland, according to the prospectuses.
The Maryland Racing Commission must license horse owners with a 5 percent interest or more, as well as officers and directors. A multi-owner entity also must provide names and personal information for all those with an interest in the company.
Michael Hopkins, executive director of the Maryland Racing Commission, who was approached by a Stronach Group official a few weeks ago, said the regulatory body would have to work through these issues if Stronach's horse ownership companies want to race in the state.
Despite the lingering questions, Capps called Stronach's IPOs ambitious.
"Nobody to my knowledge has put up a boatload of offers like this," Capps said. "It's hard to predict what the response will be."
Stewart Nickel, a managing partner at Winners Circle Partners, a horse-racing partnership in North Potomac, questioned what value an investor would get when "you're one out of 405,000 people." Each of Stronach's corporations proposes to sell 405,000 shares.
Many investors, Nickel said, join racing partnerships for the thrill of watching their horses race and to become an insider. Nickel said his investors have opportunities to visit the stables and watch the trainers at work.
But he doubts Stronach's plan would satisfy a horse lover's craving to be a part of that scene.
"I don't think it's sustainable from an excitement and communication standpoint," Nickel said. "The reality is that these people will be a number."
The proposed IPOs
•The six new corporations are named after Stronach's winning horses, including Red Bullet, the 2000 Preakness winner. The companies are Red Bullet Racing Corp., Awesome Again, Ghostzapper, Perfect Sting, Ginger Punch and Macho Uno.
•Each corporation is proposing to sell 405,000 shares at $10 apiece. Each has 20 thoroughbreds.
•Proceeds from the stock sale would repay promissory notes on the horses, each at about $1.2 million. Each corporation would also owe maintenance and management fees costing millions of dollars.
Source: Prospectuses filed with the Securities and Exchange Commission