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Monday, February 8, 2010

Update on Churchill's Proposed Youbet.com Purchase - Online Business Evermore Critical

In our post last December regarding the proposed Churchill Downs (CHDN, $34.67) acquisition of Youbet.com (UBET, $2.64), the implied value to Youbet.com shareholders was $3.18 per share. Now, following a request from the Department of Justice for more information regarding the transaction and a pullback on broader macroeconomic worries, the implied value is down to $3.04 (still above $2.84 at time of announcement). This value is well above Youbet's current share price as investors discount the risk the deal will fall apart.

We're not entirely surprised that the DoJ requested additional information since we estimated that the combined entity will control more than 50% of the U.S. online horse wagering market. However, both companies reiterate that the deal should close during the first half of 2010.

On 1/28/09, Churchill presented at an investor conference and included several slides re: online wagering, Youbet.com, and financial results/outlook:

Overall industry handle on decline:

Online is the industry's growth area:

Youbet.com will bring "better innovation and features":

Online is an important piece of Churchill's growth plan:

And, EBITDA contribution by segment:

In the end, we believe the deal will likely go through, pushing shares of both companies higher as the anticipated close date draws closer (and CHDN likely higher post close, so long as the company executes on growth plans). If the transaction doesn't occur, Youbet.com remains well-positioned as an online category leader.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long UBET.

© 2010 Jeffrey Walkenhorst
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