What Are These Guys Thinking?
A few weeks ago, I wrote an article about the horse racing industry. Maybe you remember it… I started off describing my experience getting stepped on by a horse named Slew.
You can find it here, “Then The Horse Stepped On Me…”
It’s about the horse racing industry. Track attendance is falling, profits are drying up, and companies continue struggling. Magna Entertainment Group is filing for bankruptcy and putting their prized racetracks up for auction.
I believe as the economy improves, people will return to the track. Before long, track operators will start showing a nice profit.
Despite the industry downturn, I highlighted a little company doing some exciting work in the industry. This is what I wrote
Take a look at Youbet.com (UBET). They provide live horse racing and accept wagers all online. You can visit their site and place bets at more than 180 racetracks all over the country. Their technology is state of the art. And, because they deliver the horse racing experience online, their overhead is limited.
Unlike a racetrack that only draws in visitors from the local area, UBET can attract spectators from across the country. No attendance issues because of race times or weather conditions.
Youbet’s a stellar little company poised for big growth.
An article in the Wall Street Journal a few days ago caught my eye. Churchill Downs (CHDN) – the 800 lb gorilla in the industry – agreed to acquire Youbet.com for a little more than $126 million.
They’re paying shareholders a combination of cash and stock for the operations.
Churchill’s plans are to roll Youbet’s platform into their own Twin Spires betting platform. This will give the company a huge edge when it comes to capturing the growing market of online betting. It’s the one area of growth right now in the industry.
Great news for Churchill Downs… horrible news for shareholders of UBET.
I couldn’t believe what I was reading… What the HECK are the board members of Youbet thinking?
Have they gone insane?
Look, I spent ten years in investment banking. I’ve advised CEOs on M&A deals much bigger than this. I’ve been “behind the scenes” working on these types of deals.
Let me tell you… Youbet.com is being STOLEN!
If you’re a shareholder, now’s your chance to stand up. Now’s the time to tell management and the board they’re giving the company away for a song. I’ll tell you what to do at the end.
Now, let’s look at the facts.
Churchill Downs is offering $126 million, or about $2.84 a share, for UBET. That’s 28% higher than the closing price the day before the deal was announced… not too bad… right? WRONG!
The stock was trading at a 52-week high of $3.91.
Churchill Downs is stealing the company at a 27% DISCOUNT from the high! It’s not like this high was set years ago during the dotcom boom. No, this high was set in July… just a few months ago. If you ask me, Youbet should be looking for a premium to the high!
What’s the board thinking?
At the same time the acquisition was announced, Youbet released third quarter results.
Some focused on a slight dip in revenue for the third quarter. Catching my eye is the nine month results. Revenue is growing year over year from $83.0 to $86.1 million. More importantly, the handle (or amount of betting Youbet is processing) is up almost 13% to over $373 million!
This is hardly a company that should be given away at fire-sale prices.
Look folks, this is a growth company. The amount of betting the company is handling is up and we’re in the middle of the worst recession since the Great Depression!
Can you imagine the growth Youbet will see once the recession ends?
Now, I’m not privy to company projections. I don’t know what Youbet management is telling Churchill Downs about the future of their business. Whatever they say, it should be very positive and warrant a higher price.
It makes me wonder if they even shopped around for a competing bid… When the CEO was asked that very question on the conference call, he deflected. Just take a look at the conference call transcript on file with the SEC!
What a shame.
Now let me leave you with one other quick rundown on the numbers. It will get a bit complicated, but bear with me… the results are shocking!
First, Churchill is paying $126 million for Youbet. But Youbet has $21.5 million in cash on the books. They owe $8 million in long term debt so net cash is $13.5 million.
So Churchill is really paying just $112.5 million… But wait…
Youbet has an NOL (Net Operating Loss) of $59 million… that’s like a credit against future earnings from the IRS. It would cut their tax bill in future years. Churchill can start using it right away… and it’s worth $20 million to them… just look at the Churchill SEC filings.
This cuts the purchase price down to $92.5 million…
So with 44.5 million shares outstanding, Churchill’s really only paying $2.07 a share. That’s 23.8% less than the current price!
Here’s the real kicker…
In 2008 when the economy was still weak, Youbet generated $15 million in cash flow from the business. The company will no doubt resume its profitable ways soon. I don’t know about you but I now know why Churchill is so excited to do this deal.
If Churchill pulls $15 million cash every year from the business, it’s a better than 16% return on their $92.5 million investment (purchase of UBET).
You can’t get those types of returns every day in the market.
Just think how that return improves as they cut costs and grow the business!
Clearly, Churchill is getting the better end of this deal. Their management is either incredibly savvy, or the Youbet Board is a bunch of idiots. My 6 year old niece can see Youbet’s getting the short end of the stick.
Here’s what you can do…
First, contact Youbet management directly, call 1-888-YOUBET8 (1-888-968-2388) and ask to speak with Michael Brodsky – Youbet’s Executive Chairman. Tell him you’re not voting for the deal unless they get more money from Churchill Downs!
Second, this deal needs to be approved by shareholders. So when you get your proxy in the mail, VOTE NO on the deal.
You own the company… don’t let Churchill Downs steal it!!
Category: Stocks
