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Tuesday, March 30, 2010

Youbet.com - Coming Months Should be Interesting: Three Potential Positive Catalysts

We've previously shared our estimate of implied value to Youbet.com (UBET) shareholders given the current share price of Churchill Downs (CHDN) and under multiple scenarios. Until last week, a sizable discount (approximately 10%) existed relative to the current implied value (if the deal were to close today).

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):
  1. Shareholder approval following 4/6/10 vote
  2. Transaction approval from the Department of Justice
  3. Short covering
Short interest remains elevated as some bet that the deal will fall apart -- from Nasdaq.com:

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.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long UBET.

© 2010 Jeffrey Walkenhorst
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  1. Interesting timing for a big drop in UBET after your story! How confident are you in DOJ approval?

  2. Hello Dan,

    I've no special insights into DoJ action. We'll see.... Today's decline occurred just before market close on light volume. CHDN was also down late in the day, but not as much (down 2% vs UBET off 5%). I'm inclined to think the funny trading is related to quant funds and expect UBET to recover tomorrow. That said, I'm not technical trader/person and acknowledge that short-term moves are usually near impossible to get right.



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