Wagering Site Shareholders Say No Dice to Merger

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Some shareholders of gambling Web site YouBet.com Inc. seem unwilling to leave the starting gate for a proposed merger with Churchill Downs Inc.

At least five separate shareholders of YouBet, whose primary business is online horse betting, have filed lawsuits in Los Angeles Superior Court alleging that Churchill Downs is underpaying for the Burbank company. Two weeks ago, the Louisville, Ky. company, which owns the track where the Kentucky Derby is held, announced it would acquire YouBet for $127 million, or about $2.84 a share. YouBet traded for as low as $2.22 a share just before the merger announcement.

Churchill Downs is proposing to pay for the transaction with a combination of stock and cash.

The plaintiffs are seeking an unspecified amount of damages and a possible halt to the merger. Spokespeople for YouBet and Churchill Downs did not return requests for comment.

The plaintiffs, all individual shareholders of YouBet, are Wayne Witkowski, George Bullmore, Peter McManus, Charles Seeger and Zahava Rosenfeld. Two of the attorneys did not return e-mails.

The lawsuits charge that YouBet executives did not uphold their fiduciary duty to shareholders because they entered an agreement that undervalued the company.

Noting that YouBet’s stock was trading at more than $3.70 in August, and that at least one analyst projected it could hit $4 a share, the lawsuits suggest the company could have held out for a better offer.

But Mark Argento, an analyst at Craig Hallum Capital Group LLC in Minneapolis who covers YouBet, said Churchill Downs wasn’t likely to raise its offer because of the stock involved in the deal: If Churchill Downs offers more stock, the deal could become subject to approval by Churchill Downs shareholders. And they might be reluctant to grant an OK because putting more shares into the deal could dilute the company’s stock.

“Was the price too low? We would have liked to see them get more,” Argento said. “But Churchill Downs wanted to keep the dilution of its stock down, and that capped its ability to offer more.”

Churchill Downs could skirt the dilution issue by offering more cash. But that’s unlikely because the company had only about $16.6 million in cash and cash equivalents on hand at the end of the previous quarter.

The merger has been approved by the boards of both YouBet and Churchill Downs, and is awaiting approval of YouBet shareholders and federal regulators.

YouBet has about 30 percent of the online horse betting market, which is valued at $1.4 billion. TwinSpires.com, a horse wagering site that is owned by Churchill Downs, has about 21 percent of the market.

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