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Wednesday, June 2, 2010

POOF - Now You See It, Now You Don't - Shares of Youbet Disappear as Churchill Closes Acquisition

We've been tracking Churchill Downs' (CHDN) proposed acquisition of Youbet.com (UBET) since the deal was first announced last November given our ownership of Youbet.com. For reference, we posted our detailed Youbet.com long thesis in spring 2009.

Shares of both companies retreated in recent weeks along with the broader market and potentially on news that the companies extended "the outside date for termination of their merger agreement" into 2011. The latter may have raised suspicion among some investors/traders that DoJ approval was not imminent despite management reiterations that the deal should close in 2Q10. We argued against this stance.

Well, sure enough, the transaction became a done deal as of today, somewhat surprisingly with no prior notice of DoJ approval. Management commentary and deal mechanics from Churchill Downs' press release:
  • Churchill Downs Incorporated (“CDI”) (NASDAQ: CHDN) announced today that it has completed its merger with Youbet.com, Inc. (NASDAQ:UBET).
  • “We are happy to now be able to move forward and continue the development of new technology-enabled features and services that Youbet.com and TwinSpires.com customers want, and that can attract new customers to racing,” said Robert L. Evans, CDI President and Chief Executive Officer. “In a recent survey we conducted, we learned that 34 percent of new TwinSpires.com accounts were established by people who say they have never wagered on thoroughbred racing previously. We find that an exciting development for racing and for the future growth of our online wagering business.”
  • As a result of the merger, each share of Youbet.com common stock was converted into the right to receive 0.0591 shares of CDI stock and $0.99 in cash. After the new shares are issued, CDI will have 16.48 million shares outstanding. CDI issued approximately 2.70 million shares and paid approximately $45.26 million in cash to the Youbet.com stockholders in connection with the merger. Youbet.com stock will no longer trade on the NASDAQ Capital Market and will be delisted.
The original ratio of 0.0598 was slightly reduced to $0.0591 while the original cash payment of $0.97 was increased to $0.99. Based on Churchill's $32.85 closing price today, we estimate the total consideration paid to Youbet shareholders at $2.93, well above Youbet's closing price of $2.48. Of course, it's now possible that shares of Churchill may move higher with deal uncertainty lifted.

With shares no longer trading, we're not sure what happens with all of the shorts:
Shares of Youbet are up in after hours trading this evening, but we're unsure of volume. Perhaps any remaining short position will be transferred to a CHDN short position with the $0.99 cash payment per UBET share immediately being covered (repaid). While this isn't our problem, we're curious of the solution.

It would have been nice to observe the market reaction to the DoJ news, but so be it. Onward.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long UBET.
© 2010 Jeffrey Walkenhorst
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