For all of the reasons detailed in our prior posts, we didn't expect to see a near-term sale to Churchill Downs (CHDN, $31.57). That said, today's results came up short versus our expectations with the economy and other risk factors somewhat derailing our thesis.
- Instead of Y/Y handle growth on the back of new content relationships, handle of $121.3 million was flat Y/Y. Moreover, margins came in lower than we anticipated on "an increase in player incentives and track fees". The latter is no surprise, but we suspect the former is creeping higher as YB's battles other ADW players to acquire/retain customers (*management cited success: 14% Y/Y increase in new customer acquisitions and a 6% Y/Y "in the average number of active weekly wagerers on the platform").
- G&A is running higher on "increased legal fees and other costs related to the investigation of various strategic and business development opportunities."
- Online (ADW) segment EBITDA was $2.4 million, down 40% Y/Y. For the total company, EBITDA from continuing operations was $2.9 million versus $5.5 million in 3Q08.
- Finally, although the company's net cash position increased to $8.4 million ($0.19 per share, +$5.7 million Y/Y) from $5.6 million at 6/30/09 and $2.7 million one year ago, free cash generation is running below our reduced expectations of $10-12 million this year. The company did not repurchase shares during the quarter as we'd hoped, presumably because of discussions related to today's news.
Thus, YB's relatively new management team is seemingly waving the white flag of surrender to join forces with Churchill, which was late to the online game and only built a foothold by purchasing AmericaTab in mid 2007. At that time, Churchill paid $86 million (assuming $6 million earn-out was paid) for properties generating annual handle of $175 million (purchase multiple of 0.49 times) and revenue of $44 million (1.97 times).
The proposed Youbet acquisition carries the following terms:
- CDI would acquire all of the outstanding shares of Youbet in a transaction valued at approximately $126.8 million based on the Tues. Nov. 10, 2009, closing price of CDI common stock.
- Under the terms of the transaction, Youbet shareholders would receive a fixed ratio of 0.0598 shares of CDI common stock plus $0.97 in cash for each share of Youbet common stock they own.
Still, the stock component provides an equity kicker assuming we believe Churchill Downs is currently mispriced by the Market. Prior to the company's 3Q09 report, CHDN was trading in the high $30s and, over the past five years, generally traded between $40 and $50. Churchill Downs is a larger, more profitable business today than it was five years ago. Further, we're certain that management will explain on the conference call tomorrow how the acquisition of Youbet will make Churchill even more of a powerhouse by owning and operating even more irreplaceable assets. We don't disagree -- hard to deny the scale benefit of garnering 50% of the online wagering (combined) market. Of course, one natural question is what happens to existing wagering platforms and prior investment therein (goodbye = one problem with Internet companies is that prior investment often falls by wayside through M&A or obsolescence).
Here's the implied value to Youbet shareholders under different CHDN scenarios:
We're still digesting the news. Let's see how things develop.
Disclosure: long UBET.
© 2009 Jeffrey Walkenhorst
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