I must confess that my initial reaction to the fact that CART may be put in receivership was that it would be a bad thing for the CART shareholders. This was based on my personal experience in the past as a shareholder whereby my stock became worthless when the company went bankrupt. As it turns out, that is not the case this time with CART.

First you must understand that CART is made up of two companies, the Delaware Company (the parent company) and the Michigan Company (the operating company).  The parent company got the money from the IPO.  People who bought stock, bought into the Delaware Company. 

The Delaware Company has been trickling operating capital down to the Michigan Company using money stashed away from the IPO to keep the Michigan Company (Operating Company ) in operation as needed.  The new proposal is that the Michigan Company would be put into receivership, but the Delaware Company would be left intact.  It's the Operating Company that has all the bad debt/liabilities.

The shareholders own the Delaware Company so they would be protected and paid first from any assets left in that company. (There is one outstanding lawsuit by California Speedway to get their sanctioning fee back from CART.  If they prevailed, they would get paid first.)   I am told by those in the know that the CART Board is trying their best to protect the shareholders and they are not expected to get zero for their shares of stock, something I originally assumed would happen when the plan to bankrupt was said to be the most likely scenario in a CART press release. 

While CART's 12/2/03 press release appears to have just alerted many to this situation, OWRS has already been on record on this for a couple of weeks now. CART's Definitive Proxy Statement (DEFM14A), dated 11/19, includes the following statement:

"On November 18, 2003, representatives of Heller Ehrman informed representatives of Cravath that Open Wheel is concerned that one or more of the conditions to the completion of the merger, including without limitation conditions relating to obtaining stockholder approval, the absence of certain pending or threatened litigation, Championship's ability to pay its debts when they become due, the absence of a material adverse effect on Championship, as defined in the merger agreement, and the accuracy of Championship's representations and warranties in the merger agreement relating to Championship's contracts, may not be satisfied. Representatives of Heller Ehrman also informed representatives of Cravath that, in the event that it is determined that the closing conditions are not likely to be satisfied, Open Wheel may want to discuss alternatives to the merger, including an asset purchase, to permit Open Wheel to continue the CART racing series in 2004, that Open Wheel continues to intend to complete the merger if all of the conditions to closing are satisfied and that, if the conditions to closing are not satisfied, it reserves the right to not complete the merger."

The "Heller Ehrman" indicated is special counsel to Kevin Kalkhoven working on behalf of OWRS and "Cravath" is CART's regular legal counsel.

Why was the original offer withdrawn?
OWRS had several no-go clauses that would allow them to back out should any one of them not be met by CART.  One was car count.  CART has to guarantee a minimum number of cars on the grid per their contract with each promoter.  CART could not guarantee the 2004 car count would not decrease from 2003, when 18 cars competed.  This happened when American Spirit Team Johansson, a two-car team with Jimmy Vasser and Ryan Hunter-Reay, recently went out of business.  Additionally, the Toyota Atlantic feeder series (also owned by CART) is facing a smaller lineup for 2004.  Hence OWRS would have to pay teams to compete and that is an added expense they didn't count on when they made the offer...hence they are withdrawing it.  There will be no December 19th proxy vote.

OWRS could walk away tomorrow and CART would be dead.  However, they are not doing that.

The new deal being offered to CART by OWRS will allow the bad debt/deals to be dissolved (they are associated with the Michigan Company - the one to be placed in receivership) and OWRS to take ownership of the series by buying the Parent Company, and, more importantly, the race contracts, much faster. In essence, this new deal will allow OWRS to get on with the business of running CART in 2004 faster than if they had taken ownership on December 19th after the proxy vote, a vote they were confident of winning, but it would have still taken weeks to consummate the deal after the December 19th vote.

If the CART Board accepts the new deal, it will go before a judge in a day or so and hopefully, by Friday the judge will appoint an administrator to oversee the bankruptcy process of the Michigan Company.  OWRS is expected to appear in court before the judge sometime around next Friday.  If the Administrator approves the offer by OWRS, all the existing race contracts will be assumed by OWRS. No contracts will need to be renegotiated and the race promoters will be forced to accept the transfer of the contracts over to OWRS. That is key for CART.  Without race contracts, there would be no series.  The entire process could take 60 days, however, meaning the deal may not be complete before February.

"Let's say we go in under CART and come out under OWRS. We have to approve the contract," said Bob Singleton, vice president and general manager of the Molson Indy Toronto and Molson Indy Vancouver to ESPN.com. "Molson Beer has been partners with CART for 18 years and we want to continue to support them. Are we concerned? Yes. Are we panicking? No.   The issue is timing. We were planning to put tickets on sale to the public in mid-January but we can't do that until this transaction is finished."

The estimated $7 million left in the Delaware Company portfolio can theoretically be paid out to the stockholders.  Or OWRS could pay the shareholders out of the money they were going to use if the proxy vote went forward on December 19th.  With some 14 million shares outstanding, you can do the math.  Whatever the shareholders get, it will certainly be more than if OWRS just walks away now.

In related news, I also learned why the St. Pete rights were bought from Dover by CART. CART needed to move the date from February to later in the Spring (it made no sense to have a 2-month gap in the schedule), but Dover could not accommodate them because they had other races to promote that time of year. The contract also had some issues, so it made sense for both parties to have CART take over the rights to the race. That race will run this Spring, I was assured of that today.

I also got some other good news for CART today. Infineon is still in play. They are negotiating with a couple of CART teams and it appears very likely they will be in the series in 2004, it just won't be with Pierre Kaffer driving.

Bridgestone's Al Speyer sees some positives in this latest development.

He told ESPN.com, "The good thing for OWRS is that they will invest less in the acquisition and that leaves them more money to pour back into it," Speyer said. "It could also expedite the process and, hopefully, the court will act swiftly.

"But this really hasn't changed our view much at all. We are concerned but not any more or less since this happened. I can actually see some advantages to this."

Taking CART private has been one of the hardest things anyone could have done, and if OWRS and its key principals Messrs. Kalkhoven, Gentilozzi and Forsythe are successful, a lot of CART fans, and those people who make their living working in the CART paddock, will be forever grateful.

The author can be contacted at markc@autoracing1.com

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