Mario D. Cibelli
Managing Member |
52 Vanderbilt Avenue, 4th Floor
New York, NY 10017-3808
ph 212.490.0399
fx 212.937.3115
MarathonPartners.com
|
Via Fed-Ex and Facsimile
June 17, 2008
Board of Directors
Dover Motorsports, Inc.
1311 N. DuPont Highway
Dover, DE 19903
Dear Board Members,
Recent public comments made by Dover Motorsports’ (“the Company”) executives have compelled us to contact you again.
“Successful” Company?
Denis McGlynn’s comments regarding how he runs a “successful company” stand in stark contrast to the facts surrounding Dover Motorsports.
“My world hasn’t changed all that much,” [McGlynn] says. “We’re still a successful company here, doing very well. Only because somebody is now comparing us against Speedway Motorsports, which is a megamonolith, and ISC, do we get criticized. But we are still the same successful company that we were before. So life’s not bad here. And we’re doing fine.”
Source: SceneDaily.com article, Bob Pockrass, June 6, 2008
http://www.scenedaily.com/news/articles/sprintcupseries/Do_Dover_and_Pocono_have_a_future_in_NASCAR.html
“Our model hasn’t changed,” [McGlynn] said “We’ve sort of kept our eye on our own ball here and gone about executing our game plan. We really don’t pay much attention to the other guys and what they’re trying to do to grab headlines. We’ve got a good business here. We’ve done some acquisitions ourselves with the three tracks we have outside the state. We still run a successful company here.”
Source: ESPN.com article, David Newton, June 6, 2008
http://sports.espn.go.com/espn/print?id=3429069&type=story
“Success” and “good” are not the words that come to mind regarding the Company’s track record of acquiring and developing racing facilities. In fact, Dover Motorsports’ performance over the past decade has been nothing short of terrible. We do not need to compare Dover Motorsports to International Speedway Corporation (ISC) and Speedway Motorsports (SMI) to justify our criticism. The Company has earned that honor all by itself.
Lest you forget, we will remind you of Dover Motorsports’ “successful” record.
In 1998, Dover Motorsports acquired the Grand Prix of Long Beach for a pro-forma purchase price of approximately $91 million. (This excludes subsequent incremental capital expenditures on the acquired facilities.) The deal resulted in control of the following assets: The Grand Prix of Long Beach, Gateway International Raceway, and Memphis Motorsports Park. The Company subsequently added the Grand Prix of Denver and the Grand Prix of St. Petersburg and operated these races until 2003. Ultimately, the Grand Prix piece of the acquisition was a complete failure (save some proceeds from asset sales), culminating with the bankruptcy of the CART open-wheel racing series. By 2005, only the Gateway and Memphis tracks remained part of the Company.
2002 goodwill writedown: $28,606,000
2003 goodwill writedown: $13,362,000
2003 asset impairment: $ 2,867,000
2003 asset impairment: $ 4,309,000
2006 asset impairment (Gateway): $37,357,000
2006 asset impairment (Memphis): $ 7,882,000
2006 goodwill impairment (Midwest): $ 2,487,000
In 2001, the Nashville Superspeedway hosted its inaugural race. The total cost to build the facility was approximately $100 million. This very large capital outlay was predicated upon the assumption that NASCAR would give a Cup race to the facility. Of course, this never happened. The realization that Nashville would remain without a Cup race was marked by the Company’s 2006 non-cash impairment charge related to this track.
2006 asset impairment (Nashville): $16,170,000
Estimated cumulative losses
generated by the Midwest tracks: $35,000,000
Estimated annual future losses
generated by the Midwest tracks: $ 6,000,000 per year
The destruction of value is mind-numbing. If Dover Motorsports’ management team and Board Members had not made these horrible investments and instead earned 5% annually on this wasted capital, we estimate the Company would have an incremental $320 million in cash – this is 120% of the Company’s current market capitalization. Dover Motorsports would likely be a $15 stock today if management had simply done nothing. Adding insult to injury, the Midwest tracks continue to be fed more money in the hopes that NASCAR will one day rescue Dover Motorsports from these losses. This fantasy must be put to rest.
Mr. McGlynn’s public comments make it apparent to us that he is deluded into believing the above record somehow constitutes success. The Board of Directors must share Mr. McGlynn’s opinion, given they have blessed the status quo for so long. Mr. McGlynn’s “life’s not bad here” quote is particularly insulting to shareholders, considering the only way we are compensated is by the performance of the share price.
Dover Motorsports’ share price on 4/01/2002: $7.66
Dover Motorsports’ share price on 6/16/2008: $6.20
Six-year performance: -19%
As you surely would understand, a negative return over six years might leave a shareholder feeling as if life is not so good here.
Tippie on “Cutting Losses”
If Dover Motorsports had followed Chairman Henry Tippie’s own business philosophy, found in this interview from the Tippie School of Management at the University of Iowa, the Company might not be at the crossroads it finds itself today.
“Being detail-oriented has always been important to me. I believe in getting all the facts, looking at different points of view, from different angles. It makes me a 24-hour "sleep on it" type of a decision-maker. I think it out, then go forward. If it doesn’t work, fine. I’m not one to stay with it if it doesn’t work-- I cut my losses and try something else. I don’t let decisions keep me awake at night.”
“I’m probably at my best when things are toughest. When things get tough, I feel the need to organize and straighten things out. I’m strong on planning wherever I’m going. I’m also known as an ‘attack dog.’ I‘m for attacking a problem, not running from it.”
Source: Henry Tippie interview with Business at Iowa, Spring 1999
http://www.biz.uiowa.edu/bizatiowa/BImag_s99/hbt.html
We believe Mr. McGlynn and other Board Members would do well to follow Mr. Tippie’s advice on cutting losses and trying something different when things do not work out as planned. In fact, we believe Mr. Tippie would also benefit from following the advice he gave to the business students at the Tippie School of Management. How could someone who truly has this type of business philosophy continue to waste so much money on the Midwest tracks?
Biting the Hand That May Feed You
As you are aware, SMI Chairman Bruton Smith has been a successful consolidator of motorsports facilities over the past twelve years. Over the past year, SMI has been very active in adding to their portfolio, acquiring New Hampshire International Speedway for a record $340 million in cash and Kentucky Speedway for $78.3 million. In addition, Mr. Smith has been widely quoted as being interested in further adding to SMI’s portfolio.
Why would Mr. McGlynn see fit to criticize or direct backhanded complements to the most aggressive acquirer of motorsports tracks in the country? SMI is one of the two most likely suitors of Dover Motorsports.
“That costs us fans because the fans really care more about what’s going on with Kyle Busch and Dale Earnhardt Jr. than they do whatever Bruton Smith’s latest headline is,” said Dennis [sic] McGlynn, the president and chairman of Dover International Raceway. “We’re losing focus on our business.”
Source: ESPN.com article, David Newton, June 6, 2008
http://sports.espn.go.com/espn/print?id=3429069&type=story
“Bruton is a smart guy and a very successful guy and I give him all the credit in the world for everything that he’s accomplished,” McGlynn says. “But I’m not certain it’s necessary that everybody hang on his every whimsical notion.”
Source: SceneDaily.com article, Bob Pockrass, June 6, 2008
http://www.scenedaily.com/news/articles/sprintcupseries/Do_Dover_and_Pocono_have_a_future_in_NASCAR.html
"I think a lot more time and attention is spent on Bruton's every breath than is necessary," [McGlynn] said. "It's dominating our weekend here. He had his weekend in Charlotte. We're here to promote three big races, not Bruton. That's my only comment on it. It doesn't make me angry, but we have our own game plan here we're trying to execute, and this just gets in the way sometimes."
Source: Nascar.com, David Caraviello, May 30, 2008
http://www.nascar.com/2008/news/headlines/cup/05/30/dover.uncertain.future/index.html
The above quotes are especially troublesome given Mr. Smith’s comments, in which he believes Dover is “more or less for sale.”
Smith did, however, say he's had some conversations with the owners of Dover International Raceway and it's his understanding that the track is “more or less for sale.”
Source: Associated Press / Cincinnati.com article, Dan Gelston, May 27, 2008 http://news.enquirer.com/apps/pbcs.dll/article?AID=/20080527/SPT/305270063/-1/back01
McGlynn doesn't know how Smith will solve his problem at Kentucky and Las Vegas. Any sale of Dover would have to be approved by the board, and as far as he or executive vice president Mike Tatoian knows, no major discussions with SMI have been held.
Source: ESPN.com article, David Newton, June 6, 2008
http://sports.espn.go.com/espn/print?id=3429069&type=story
Setting aside the occasional mistranslation from spoken word to printed quotes, the above statements appear to be in conflict with one another. Unlike Dover Motorsports, Bruton Smith and SMI have focused their acquisitions on top-shelf properties that have retained and grown value. Dover Motorsports could have chosen such a strategy years ago, but unfortunately decided to purchase sub-prime racing assets instead. Bruton Smith and SMI clearly have a need for further Sprint Cup race dates, yet Dover Motorsports’ management sees fit to criticize Bruton Smith rather than engage him. Why in the world would Dover Motorsports’ management team engage in this kind of behavior? Rather than focusing on what Bruton Smith says, we suggest looking at what he has done. SMI has been an aggressive purchaser of racing assets, and recent moves have created a need for additional Sprint Cup dates. Given Dover Motorsports’ need for a suitor due to its competitive disadvantage versus the industry giants, there is no purpose served by alienating or criticizing one of the two most logical buyers of the Company.
Obligation to Explore Alternatives
It appears that the Company has been approached on a regular basis by potential acquirers. Yet, apparently not a single approach has been serious enough to warrant the creation of a committee to explore strategic alternatives for the Company.
Denis McGlynn, the president and CEO of Dover Motorsports, would not comment on whether there have been talks with Smith or anybody from SMI. He said the track is approached on a regular basis about selling, but he can't foresee under any circumstances there not being Cup racing at the one-mile track.
Source: ESPN.com article, David Newton, May 29, 2008
http://sports.espn.go.com/rpm/nascar/cup/news/story?id=3417365
The Dover track serves markets in Baltimore, New York, Philadelphia and Washington, D.C., among others. Denis McGlynn, president and CEO of Dover Motorsports, said there are routinely offers for the 1-mile track. He didn't expect the Sprint Cup Series to desert Dover, even if the concrete mile was ever sold.
Source: Associated Press / Cincinnati.com article, Dan Gelston, May 27, 2008
http://news.enquirer.com/apps/pbcs.dll/article?AID=/20080527/SPT/305270063/-1/back01
So could Dover Motorsports be sold to ISC or SMI? “We would do whatever is best for the shareholders,” McGlynn says.
Source: SceneDaily.com article, Bob Pockrass, June 6, 2008
http://www.scenedaily.com/news/articles/sprintcupseries/Do_Dover_and_Pocono_have_a_future_in_NASCAR.html
What is particularly striking is the fact that the Board of Directors has been so passive for so long. Mr. McGlynn states that he will do whatever is best for shareholders. Wouldn’t the divestiture of the Midwest tracks be in the best interest of shareholders? Wouldn’t an auction of the Company be in the best interest of shareholders given the recent multiples paid for tracks? The Board Members’ obligation to the owners does not stop at reviewing proposals. In light of the horrendous performance over the past six years, the Directors should be proactive in fulfilling their fiduciary obligation to maximize shareholder value, not merely waiting for the phone to ring with a $15 cash offer. Why does the Board of Directors continue to be so passive regarding the future of the Company?
Right of First Refusal has No Place for Publicly-Traded Dover Motorsports
Given the Board’s inaction in the face of recent motorsports transactions, coupled with recent quotes by Dr. Mattioli clearly stating that he would only sell Pocono to the France family, we want to remind Directors that such an agreement, whether implied or on paper, has no place with this New York Stock Exchange-listed Company. An open auction that did not selectively discourage potential buyers would be the only way to ensure a fair process for the outside shareholders of Dover Motorsports.
“It would be a cold day in hell that I would sell it to somebody else,” Mattioli says. “And not only that, the way it is set up, I can’t. They know that everything that I do is for the benefit of the France family and NASCAR.”
Source: SceneDaily.com article, Bob Pockrass, June 6, 2008
http://www.scenedaily.com/news/articles/sprintcupseries/Do_Dover_and_Pocono_have_a_future_in_NASCAR.html
In case you do not remember, the Company made a huge money losing investment in Nashville on a “promise” that it would receive a Winston Cup (currently Sprint Cup) race event from NASCAR. Directors will not be able to simultaneously fulfill their fiduciary obligations to the public shareholders and attempt to deliver Dover Motorsports to a specific buyer. While we are unsure of whether such an agreement exists for Dover, we only seek to remind you that a sale of the Company must be handled in an above-board manner to ensure potential conflicts do not result in damages to the outside shareholders of Dover Motorsports.
Ripe for Change
Jerry Carroll concisely states what the outside shareholders of Dover Motorsports have realized for quite some time: “It’s time for change.”
“I think Dover would be ripe,” Carroll said. “I don’t think there has been much change there. I don’t think they have much enthusiasm to do anything. I think the old guard is still there, and it’s time for change.”
Source: Scenedaily.com article, Bob Pockrass, May 23, 2008
http://www.scenedaily.com/news/articles/sprintcupseries/Former_owner_Kentucky_sale_predicated_on_promise_of_Cup_date.html
While management and Board Members may not be thrilled with comments like this or our letters, both shine the light of day on the Dover Motorsports situation. You must realize we are merely expressing the frustration of what many of the outside shareholders must be feeling. The current situation is untenable for both long-term and short-term reasons. Board Members are treating the public shareholders as second-class citizens. Clearly, there is little regard as to how the outside shareholders are faring. What other conclusion can be reached given the track record of value destruction, the ongoing Midwest albatross, and the inability to complete a transaction despite record prices being paid for racing assets?
For all this, Dover Motorsports’ Board Members decided that senior management deserved a base salary raise in 2008. Given the continuation of the employment and non-compete agreements, these increased salaries have a multiplying effect which juices-up compensation to certain Board and senior management team members in the event of a change in control. We are sure all of Dover Motorsports’ outside shareholders would agree to not operate a racing business within 100 miles of the Company’s facilities if they could also participate in this overly generous compensation plan.
The Directors of Dover Motorsports seem to be in a trance. Gentlemen, when will someone on this Board stand up and fight for the outside shareholders of the Company? This situation conflicts with your role as a fiduciary to the owners of the Company and it must be rectified.
You can blame the messenger, or alternatively, you may consider the circumstances that have caused the outside shareholders to take such a dim view of the Company. Thank you for your time.
Sincerely,
Mario D. Cibelli
Managing Member