Youbet Hits Jackpot After TVG -
Folds Hand on Stock Purchase

WALL STREET WEST

Youbet.com Inc. made a risky wager in 2001 when it granted Gemstar-TV Guide International's TVG Network the right to buy 51 percent of its shares, in exchange for rights to rebroadcast horse races over the Internet. The partnership didn't go so well in February, the two sides settled a legal battle over control of Youbet, but only after a bitter proxy contest.

Now, Youbet is finally seeing a payoff, in the form of a booming stock price. On March 31, Youbet announced that TVG had decided not to exercise its warrant and would instead accept 1 million shares of Youbet common stock, a fraction of the 21.6 million shares to which TVG was entitled. TVG already owned about 4 million shares of the company.

In the five trading days following the announcement, the stock of Youbet increased 54 percent, to $5.60 per share on April 7 from $3.64.

"We had assumed dilution of the shareholder base, and when TVG decided not to exercise the warrant, it removed the uncertainty about investing in the stock," said Todd Eilers, a gaming analyst with Roth Capital, which upgraded Youbet to a "strong buy" on April 2. "With the uncertainty removed, it opened up the door for a lot of people to come in."

Eilers said he is not sure why TVG decided not to exercise the warrant but believes that the company did not want to pay $36.5 million to acquire 21.6 million shares of the horse-wagering company even if the price was a discount from Youbet's market price.

"They were probably not willing to pony up that amount of capital," he said.

Charles Champion, chairman and chief executive of Youbet, said the company had planned two future strategies depending on TVG.

He said TVG's decision to not exercise the contract has more upsides because the higher stock price might attract institutional investors and fund managers. Coghill Capital Management, JP Morgan Chase & Co. and Barclays Bank are currently Youbet's top institutional investors, with each holding more than 1 million shares.

"There are certain limits on funds on what they can invest in if the stock is under a certain amount of dollars," Champion said. "We have reached the magic markers now that we've cleared the $5.25 level."

Champion said the company now plans to go forward with partnership and acquisition plans, some of which might require additional capital. The company will announce those plans in about a month, he said.

Karey Wutkowski



The Ratings Game

The Department of Water & Power has been telling the Los Angeles City Council that it needs an 18 percent hike in residential water rates to ensure its bond rating doesn't drop.

But bond analyst Patrick Murphy at Standard & Poor's said that the rate hike has nothing to do with current bond ratings, which he reaffirmed last week at 'AA.'

"The LADWP's rating is unaffected by the City Council's decision not to approve the proposed rate increases," he said.

Last week, a City Council committee demanded an independent financial review of the utility's proposed rate actions.

Stacy Bellew, a spokeswoman for City Councilman Tony Cardenas, said several lawmakers were shocked when utility officials were unable to explain the reasons behind the rate increase.

She said that after the sessions, City Council President Alex Padilla admonished DWP staffers for exaggerating the threat of a rating downgrade.

Robert Rozanski, DWP's assistant chief financial officer and treasurer, who testified last week before the Council's Commerce, Energy and Natural Resources Committee, said he could not pinpoint a time frame for a potential downgrade in the utility's bonds.

"If we don't get the proposed revenue increases, we won't be downgraded right away, that's probably true," he admitted.

More relevant is that DWP has a six-year, $2.5 billion capital improvement program that calls for $700 million to be funded by customers with $1.7 billion raised through new bond issues, he said.

Most of the improvements are needed to bring the agency's water quality systems in line with state and federal regulations. The utility also must upgrade its distribution system of aging pipes, increase security to prevent terrorist attacks, and pay for the restoration of Owens Lake as part of a class-action settlement approved last year.

Though the DWP proposed a rate increase of 11 percent this year and seven percent in 2005 which roughly translates into a $50 increase to residential water bills analysts expect the agency will need far bigger rate hikes to fund these projects in the future.

"On a long-term basis, they have plans for even greater rate increases," said Murphy.

Rozanski agreed that further rate hikes would be necessary. The utility has not raised rates since 1992.

The rate proposal had not been heard by the whole City Council and is pending a financial review, though a rate increase could be approved in the short-term.

"The increases in operations and maintenance costs and the capital investments all of that contributes to a need for revenue increases," Rozanski said.

Kate Berry

Home Rules

Homestore Inc., still recovering from the fraud scandal that rocked the company, has tweaked its ethics code and published it in an SEC filing.

The Westlake Village-based online real estate marketing firm filed a Form 8-K with the Securities and Exchange Commission on March 31, announcing that it had approved amendments to beef up the company's code of ethics.

The changes were made to bring the company's document in compliance with the Sarbanes-Oxley Act, said Erin Campbell, director of corporate communications for Homestore.

But even those rules don't require an internal ethics code to be published. The company wants to demonstrate why it should not be judged by its past, she said.

"We have had to rebuild trust with investors and customers and employees," Campbell said. "We're letting all audiences know that we believe strongly in ethical behavior."

Under the amended ethics code, Homestore's senior financial and executive officers must get the permission of an independent member of the board to waive any part of the code. It also calls for the maintenance of internal controls to assure that transactions and financial records are in line with the code, that employees are subject to all laws and regulations even if they're not in the code, and that executives' filings with the SEC must be full, fair and accurate.

Four former executives at Homestore have pleaded guilty to charges related to inflating revenues.

The shares closed at $4.65 each on April 7, and hit a 52-week high of $5.58 on Jan. 15.

Karey Wutkowski

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