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Dover Motorsports and Dover Downs Merger – Borderline Criminal

September 29, 2010 | About:
Imagine that you and your close partner own a business together. For whatever reason, you decide to put it up for sale. You trust that your partner will shop it around for the best price because that’s what partners do. Your partner approaches some competitors who are willing to pay $5 for it, but he or she wants $7 to $8 for it, and therefore, does not allow the sale to go through even though you would be satisfied with $5. Then, as the economy deteriorates, so does the competitors’ willingness to pay a high price for your business. Unfortunately, your partner does not want to budge on the price at all. Finally, your partner makes an announcement that he or she will buy your interest from you for less than $2. How would you feel? I would feel angry and betrayed. As a partner, I would expect to be treated fairly and paid a fair price.trans.gif

This is exactly the story that many shareholders, including myself, are going through with Dover Motorsports (DVD). The company recently announced a merger of Dover Down and Dover Motorsports which would entail Dover Down (DDE) purchasing Dover Motorsports for less than $2 per share. Dover Down is also controlled by the same management, so by announcing this merger, Dover management is simply trying to buy out Dover Motorsports’ shareholders at a dirt cheap price.

When you buy shares in a company, you are becoming partners with the management, and they should be acting in your best interest. However, over the years, Dover’s management did nothing but destroy shareholders’ equity, and now, instead of compensating them for their past incompetence, they are adding insult to injury by trying to buy them out at an unfair price. In fact, Levi & Korsinsky, a law firm, is investigating the Board of Directors of Dover Motorsports, Inc. for possible breaches of fiduciary duty and other violations of state law in their attempt at a merger. Dover’s decision to announce the merger implies that there are no higher bidders at the table. Really? Let’s take a look at their own letter that they sent to Mario Cibelli dated September 9, 2009. In this letter, Klaus M. Belohoubek, Senior Vice President – General Counsel of Dover Motorsports, Inc., says,

“On May 2, 2007, Henry Tippie and I, together with other Dover Motorsports’ executives, met with Bruton Smith, Lesa Kennedy and various other people at an airplane hangar in Dallas, Texas. The purpose of the meeting was to entertain an offer to acquire Dover Motorsports from an alliance that had been formed by Speedway Motorsports, Inc. (TRK) and International Speedway Corporation (ISCA). … Mr. Smith proceeded to offer to buy the company at market value with no premium. After about an hour of discussions, he offered an additional nickel per share. Why he chose to be so insulting is anyone’s guess, but the meeting adjourned shortly after this.”

Based on this letter, you can see that Smith offered to buy Dover Motorsports at market value with no premium, and Dover Motorsports’ stock closed at $5.85 per share on May 2, 2007. Obviously, $5.85 per share was not enough for Dover’s management. They probably wanted $7 or $8 per share. Now, the management wants to buy out shareholders at less than $2 per share and expects them to be satisfied with this price. If Smith was willing to pay nearly $6 in 2007, it’s hard to believe he wouldn’t be willing to offer more than $2 per share now. But this was in 2007. What about now? Are there any other possible bidders? According to Wells Fargo Securities Consumer Conference that took place at 8:30 AM ET on September 29, 2010, International Speedway Corporation presented and an analyst asked the following question:

“I am sure you guys have seen the Dover Down’s Motorsports merger announcement. If the management in the past has talked about opportunistic acquisitions at the right price, I think that in an auction process, at a ‘no premium to market’ price of Dover Motorsports and at zero breakup fees, it seem like your offer could easily top Dover Down’s bid.”

John R. Saunders, President of International Speedway Corporation answered:

“We’ve been in discussion with the Chairman [Henry B. Tippie] of that company for several years and when we were focused just on the motorsports component of that business, we never could come to an agreement on price. Dan can speak more to their financial situation, but we also believe it is still just the motorsports piece of the business that is challenged by some of the other properties that they have. It’s a real drag on cash flow. However, it doesn’t preclude us from taking a look at it in the future, especially with a gaming partner, but we’ve just not been able to come to an agreement with the price with those folks.”

Daniel W. Houser, Chief Financial Officer of International Speedway Corporation added:

“Thanks, John, I think that … point well taken, we’re digesting the information that we saw there and what strategic opportunities may be available to us now and in the future. As John said, we are interested in the assets and in the properties, but that means at a price that makes sense for ISC and its shareholders. In the past, we’ve had discussions with the Dover folks from time to time, kind of on and off. We kind of had an ongoing dialogue, but nothing that has really made sense for us up to the point of the announcements we’ve seen in the last couple of days.”

From the answers from both of these gentlemen, it is pretty obvious that International Speedway Corporation is and has always been interested in acquiring Dover Motorsports but has never been able to do so because of the management, who does not have shareholders’ best interests in mind. Now, for the first time, as noted by Houser’s comment above, the merger announcement is a sign that there may be an opportunity for International Speedway Corporation to be able to acquire Dover Motorsports. If International Speedway Corporation does make a higher offer, will Dover’s management take it? Who knows? But so far, Dover’s management has been blatantly selfish and borderline criminal. I am not sure how they can sleep at night knowing that they are stealing from hundreds of shareholders to further their own interests.

Disclosure: The Author Owns DVD and ISCA.

About the author:

Mariusz Skonieczny
Mariusz Skonieczny is the founder and president of Classic Value Investors, an investment management firm. He is also the editor of Ultimate Value Finder, a monthly newsletter that features three underfollowed, unknown, and undervalued companies ignored by Wall Street.

Visit Mariusz Skonieczny's Website


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