Horse betting site Youbet.com Inc. is limping painfully down what may be the home stretch.
One business it acquired has put the company $15 million in debt, and another recent purchase was shut down amid government investigations. A client that brings in a quarter of its business has been caught in a litigation battle and has frozen its contract.
Its stock price has dropped below $1 and Nasdaq has threatened to delist the company.
Youbet.com’s shares traded at around 76 cents last week, after a long dive from their peak at $6 in 2005.
The company doesn’t have a permanent chief executive. Former CEO Chuck Champion walked away in November and the company’s chief operating officer, Gary Sproule, has temporarily taken the helm. He declined to comment.
The company could recover as it rebuilds its core business strength, but a possible outcome is a takeover as the online wagering sector consolidates, analysts said.
The company is scaling back from two businesses a bet processing company and a company that services high rollers to focus on online gambling, its core.
Youbet.com offers broadcasts of horse races, access to handicapping information, and the ability to place bets on races at 150 race tracks.
“They’re returning to their roots. That’s the right strategy,” said Nick Danna, analyst at Sterne Agee & Leach Inc.
Youbet.com is looking to sell United Tote, a bet processing company it acquired for more than $32 million in 2006. Analyst Mark Argento of Craig-Hallum Capital Group said the company could probably sell it now for $20 million, which could go directly to paying down the $15 million debt the company incurred to buy and operate United Tote.
Meanwhile, the closure of International Racing Group, a high-end bettor concierge company that Youbet.com acquired in 2005, will also help the company refocus its energy solely on the online wagering service. A five-month federal investigation into the activities of IRG resulted in the seizure of $1.5 million in cash from the company and its dissolution.
IRG was an offshore phone service for high rollers, allowing them to place large bets on horse races. The closure cost the company $12.5 million.
The U.S. Attorney’s Office in Las Vegas decided not to file charges over what it said were wagering activities of employees and clients.
The IRG closure was a factor in the company’s dismal quarterly statement. Youbet.com reported a net loss of $28.7 million for the fourth quarter 2007, compared with a net loss of $5.1 million in the fourth quarter 2006.
As if that weren’t enough, Youbet.com is suffering because of a patent infringement suit between TrackNet Media a joint venture of two leading horse racing companies, Churchill Downs Inc. and Magna Entertainment Corp. and media company TVG. Because of this dispute, Youbet.com has not been able to accept wagers on Churchill Downs and Magna Entertainment’s horse races, which accounted for 25 percent of the company’s total wagers.
The noncompliance notice Youbet.com received from Nasdaq could be addressed easily, Argento said. The company could simply do a reverse stock split, which would lessen the number of shares while maintaining investors’ value.
“The Street looks forward and not back,” Argento said. “The company is being returned to its original state. They’re building credibility.”
The current share price reflects loss of confidence by investors as major shareholders have reduced holdings or sold their shares altogether. The company’s guidance for 2007 had forecast a gain of up to 20 cents per share, but Youbet.com lost 65 cents per share instead.
The fact that the company is doing major house cleaning makes it an attractive candidate for an acquisition, Danna said. Churchill Downs acquired Youbet.com’s competitors, Thoroughbred Sports Network and Bloodstock Research Information Services, last year.
“There is a fair amount of duplicative costs by a handful of businesses,” Danna said. “The industry is ripe for consolidation.”
