Here's the Spin on a Wheel Deal

By JAMES F. PELTZ

Sept. 26, 1997 12 AM PT

TIMES STAFF WRITER

The California Speedway, the new West Coast cathedral of racing built by Roger Penske, cost $120 million. Yet Sunday’s Marlboro 500 CART Indy car race is the centerpiece of one of only three weekends of racing this year and, after mid-October, there won’t be another for five months.

How, then, does Penske make the two-mile oval track not only pay for itself when the 72,000 grandstand seats are usually empty, but also generate enough income to keep the business in high gear for years--and turn a profit in the process?

In Penske’s version of Raceway Economics 101, start with the fact that the speedway and its underlying 530 acres of Fontana land are mostly paid for, without Penske having had to go deeply into hock.

Instead, he raised most of the needed cash by exploiting two current trends: the surging popularity of racing--especially NASCAR-sanctioned stock car events--and the roaring stock market.

That’s a huge advantage, because it means the California Speedway has “carrying costs”--similar to the mortgage on a house--that are fairly small.

There’s more. The immense popularity of racing enables Penske to command top dollar for tickets and affiliated revenue producers--concessions, souvenirs and the like--and still fill the house on race days.

The average ticket price for Sunday’s race is a hefty $54--just as it was in June when the track held its inaugural race, a NASCAR Winston Cup event--and grandstand seats go as high as $95. The track doesn’t charge for parking, however.

Also, Penske has merged the California Speedway with his two other tracks--Michigan Speedway near Brooklyn, Mich., and Nazareth Speedway in Nazareth, Pa.--into one company, Penske Motorsports Inc., and so each can help support the other financially if need be.

And to keep cash flowing into the California Speedway on non-race days, Penske plans to use a tactic employed by other tracks past and present. He will rent the speedway to others for testing cars and tires, conducting driving classes, filming television commercials and the like.

Les Richter, the speedway’s executive vice president, said he expects someone to use the track or its adjacent parking lot about 300 days a year.

He also said the track--assuming it keeps selling out its big events at current prices--could sustain itself without such ancillary income. But the extra cash gives Penske Motorsports a financial cushion, helps pay for its 45 full-time employees and adds support to the company’s profits, which in turn supports its stock price.

“It’s like putting chocolate fudge on top of a vanilla cone,” Richter said.

Make no mistake, though: The California Speedway’s success “is going to be driven by the major races,” said Breck Wheeler, an analyst at the securities firm J.C. Bradford in Nashville.

Indeed, a full year’s worth of extra income from renting the track won’t amount to the $18 million that one big race--the Marlboro 500 or last June’s NASCAR race--will generate in gross revenue in a single day. That’s also why Penske is pressing hard to get a second NASCAR Winston Cup race added to the Speedway’s schedule.

There’s another reason. Bo Cheadle, an analyst at the investment firm Montgomery Securities in San Francisco, calculates that a big-league NASCAR race throws off $8 million in pretax profit for a track in one day--more than is generated by a CART race or any other form of motorsports.

To be sure, the two major (and now defunct) Southern California tracks that preceded Penske’s track--Riverside International Raceway and the Ontario Motor Speedway--also rented themselves out to generate extra cash.

But the Riverside track fell victim in 1988 to suburban sprawl that made its real estate more valuable for stores and housing than for racing, and Ontario collapsed in 1980 under the weight of excessive debt and poor attendance. And in Ontario’s case, it failed before it could tap the enormous popularity of racing seen today.

Penske’s timing was more fortuitous. He started by combining the Michigan and Pennsylvania tracks, two subsidiary businesses that sell racing-related merchandise and tires--and the promise of the Fontana facility--into Penske Motorsports. He then sold a minority stake in that company to the public to pay most of the California Speedway’s construction costs.

Sold at $24 a share in March 1996, the stock raised $82.7 million for Penske Motorsports, which then plowed about $72 million of it into the track’s construction. The balance of the building costs came from bank loans, cash flow from the two other tracks, and advance ticket sales for the speedway’s events.

In effect, Penske persuaded investors to pony up most of the track’s construction costs for potential stock profits, not only from the track here but all three of his racing sites. And with the stock market (and NASCAR) already red hot, investors were persuaded in short order.

So far, they have been rewarded. Penske Motorsports currently trades around $34 a share, giving the initial investors a 42% return over 18 months if they still hold the stock.

The biggest beneficiary is Roger Penske himself. His privately held Penske Corp.--a conglomerate with interests not only in auto racing but in manufacturing, car dealerships and vehicle leasing--still owns about 59% of Penske Motorsports, or 7.8 million shares. The jump means the value of Penske’s stock in Penske Motorsports has swelled by $78 million, to $265 million.

Also benefiting is Kaiser Ventures, which traded the speedway’s land--the track was built on the site of the former Kaiser steel mill--for stock in Penske Motorsports. Kaiser Ventures still owns 12% of the company.

Penske made another calculated move when he built the track. Although many established speedways have 90,000 seats or more, he put in a conservative 72,000 grandstand seats to help ensure sellouts.

Why? To avoid any chance that TV cameras could pan empty rows of seats that would signal to viewers that the speedway was anything less than a smashing success. All seats for the June NASCAR race and this Sunday’s CART race were sold.

“We wanted to make sure we could sell out our races,” acknowledged Richter. “Right now, we wish we had more seats for this weekend. But we’re not crying.”

Penske’s plan is to add about 35,000 grandstand seats during the next few years if racing’s popularity continues, especially if the California Speedway gets a second major NASCAR event. Capacity in the track’s luxury suites, 3,500 seats, and for infield admission, 15,000, probably will stay the same.

But no matter the track’s seating capacity, or whose money was used to build the place, the California Speedway now has to generate enough continuing profits to confirm that building the track was a sound financial decision.

How? By earning enough profit each year to afford a handsome return on the track’s construction costs, what bean counters call a good return on invested capital.

In other words, if the track can’t earn somewhere between 8% and 15% every year on its $120 million construction bill, then Penske and his investors would have been better off plunking their millions into U.S. Treasury bonds that currently yield about 6 1/2%.

So far, the track seems to be paying off. Using Cheadle’s estimates of how much pretax profit each type of racing generates, the California Speedway’s list of races this year should give Penske and his speedway a nifty 13% return on invested capital--for 1997 at least.

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HOW THE WHEELS GO ‘ROUND

The California Speedway, site of Sunday’s Marlboro 500 CART race, is owned by Penske Motorsports Inc., one of auto chieftain Roger Penske’s companies. Here are figures on how Penske Motorsports--which also owns tracks in Michigan and Pennsylvania, and merchandising and tire businesses--finances its operations:

The money involved, in millions*

Total revenue: $ 51.7

Cost of operations: 36.3

Income taxes: 6.0

Profit: 9.4

Where the money comes from

(% of total revenue)

Ticket sales: 38.1%

Other speedway revenue+: 30.5

Merchandise, tires, accessories: 31.4

Where the money goes (% of total revenue)

Cost of operations: 70.2%