By Bethany McLean

(FORTUNE Magazine) – CANADIAN BILLIONAIRE FRANK Stronach made his fortune by building Magna International into one of the world's top suppliers to the automobile industry. His passion, though, has long been thoroughbred racing--so much so that in addition to buying a stable of horses, he started buying racetracks in a bid to revive the ailing industry and create a gambling colossus. But both the racing world and Wall Street are skeptical of Stronach's ambitions--and recent machinations gone wrong within his empire have some wondering whether this is a bet that can ever pay off.

Stronach's foray into racetracks began back in 1998, when Magna bought Santa Anita, the legendary California track where Seabiscuit ran his last race. Shortly thereafter, worried that he planned to fritter away Magna profits at the track, Magna International shareholders pushed Stronach to spin off Magna Entertainment into a separate company and limit the amount of their cash that he would funnel into racing. Thus far, their fears that it would be a black hole have proven well-founded. Thanks in large part to write-downs of several of the tracks it acquired, Magna Entertainment has lost $125 million in the past 2½ years. It has also racked up $420 million in total debt. The stock sells for around $5 a share, down from a high of almost $10 in early 2002.

Stronach hasn't pleased all racing fans either. Racing is a club, and Stronach is an outsider. But he's also hurt his credibility by not always living up to his rhetoric that Magna Entertainment would restore tracks such as Pimlico, home of the Preakness, to their former glory. "Grand promises, little accomplished," reads one post on handicapping advisory service Thoro-Graph's message board, expressing the discontent.

The latest controversy involves what some think was a plan to circumvent the limitations on Magna International's ability to pump cash into Magna Entertainment. The details are complicated, but last year Magna spun off the factories where it assembles things such as engine cradles into yet another separate public company called MI Developments (MID), which makes its money by collecting rent from Magna. This past July, MID announced that it would acquire all of the racing operations. While MID already owned a 59% stake in the racing business, any transactions between the two had to be approved by an independent committee. One thing the acquisition would do would be to enable MID to collect cash from Magna and funnel it into the racing business, with no approvals necessary. It's not just conspiracy theorists who think that MID was set up essentially to provide financing for Magna Entertainment.

Shareholders of both MID and Magna Entertainment were apoplectic about the deal. MID shareholders didn't want their cash-rich company dragged down by the racing operations. And although Magna Entertainment stockholders were supposed to get a 20%-plus premium, they complained that the price didn't reflect the value of Magna Entertainment's real estate and, more important, the prospect that various states would legalize lucrative slot machines at Magna tracks. "We feel like the rug is being snatched out from us after a long period of patience," said Magna Entertainment shareholder Tim Rice, the managing partner of research firm Rice Voelker, in a conference call. And so, in mid-September, the two companies scuttled the deal.

But the saga doesn't end there. For Magna Entertainment to fulfill its ambitions, it needs cash. The approval of slot machines in states such as Florida could be a windfall, but installing the machines and making the promised improvements to existing tracks could cost hundreds of millions. If MI Development's now-wary shareholders won't fork over more money, Magna Entertainment will have to be creative about finding funds--and its track record is not inspiring. Management didn't return calls for comment.

Magna Entertainment's future also has big implications for the rest of the racing world. For the past year Stronach has been making noises about acquiring the New York Racing Association, or NYRA, which owns the Saratoga, Belmont Park, and Aqueduct tracks. (NYRA, a nonprofit licensed by New York State, is viewed as the bastion of the East Coast racing establishment.) Even though NYRA is reeling from investigations (including one by New York State attorney general Eliot Spitzer) that resulted in the conviction of a slew of employees on tax fraud, and the indictment of NYRA itself, it has dismissed Magna Entertainment's overtures. For its part, Magna Entertainment has retained lobbyists, including former U.S. Senator Alfonse D'Amato, to press its case in Albany.

There's no question that Stronach has proven his business acumen with Magna International. And there's also no question that plenty of people lose fortunes on their hobbies. But usually they play with their own money. -- Bethany McLean