Last Thursday, shares of Youbet spiked on higher volume:
Now, the gap is a more modest 5%. With shares of Churchill Downs at $38.32, the implied value to Youbet.com shareholders is around $3.26 per share. For a valuation range, please see our summary table posted in early March and in our initial post regarding the transaction.
While we've slightly reduced our Youbet position in favor of companies we believe are trading at larger discounts to fair value -- at this point -- we're inclined to see what unfolds over the next month or so. We see three potential near-term positive catalysts that could further close the discount (and excite merger arbitrage investors):
- Shareholder approval following 4/6/10 vote
- Transaction approval from the Department of Justice
- Short covering
Yahoo Finance! reports Youbet's float at 24.1 million shares, although we suspect true liquid float may be even lower as certain institutions may retain shares through transaction consummation. However, assuming the 24.1 million figure, short interest stands at approximately 5% of float. If the deal goes through, the shorts will need to cover their positions by purchasing shares of Youbet, possibly pressing shares to or even above the implied value.
April/May could be very interesting.
Disclosure: long UBET.
© 2010 Jeffrey Walkenhorst
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