With Gambling Site on a Roll, Gemstar Deals Suit to Youbet

WALL STREET WEST

Online betting firm Youbet.com is locked in a tangle with its largest outside investor, Rupert Murdoch-controlled Gemstar-TV Guide International Inc.

Los Angeles-based Gemstar, which holds warrants convertible into a 51 percent stake in Youbet, filed suit in Delaware Chancery Court on Sept. 5 seeking to postpone Youbet’s scheduled annual meeting on Sept. 26 until the Woodland Hills-based firm “provided full and fair disclosures” about two proposed proxy measures.

The proposals, including one that creates a 67 percent supermajority voting requirement for any amendments to Youbet’s charter, are “blatant attempts” to keep Gemstar from exercising its voting rights, Gemstar alleged.

The dispute arose from a two-year old deal in which Gemstar, whose TVG cable network carries horse races, granted Youbet a license to broadcast and accept wagering on the races over the Internet. In return, Youbet granted Gemstar warrants convertible to a 51 percent stake and a majority of board seats if Youbet’s business were to improve.

“The Track Content and Patent License Agreement with Youbet.com is part of a sound growth strategy,” said Mark Wilson, the president of Gemstar’s TVG Network division in a press release at the time.

Two years later, Youbet’s business has improved, to the point where the warrants may actually have some value.

In the second quarter ended June 30, Youbet’s revenues surged to $13.8 million from $6.1 million in the like year-ago period. The company still loses money, but its stock price has risen to $2.87 a share at the Sept. 18 close from $1.36 at the time the deal was signed.

Currently, Gemstar owns 14 percent of Youbet; its remaining warrants are exercisable at a price of $2.50 each.

Gemstar alleges that Youbet’s board is trying to protect the interests of its executives, including co-founder and Vice Chairman David Marshall who controls a 25 percent stake.

When Gemstar complained to Youbet last month, its chairman, Charles Champion, said that it wouldn’t “violate or impede” Gemstar’s rights, but failed to either “withdraw or modify” the two measures, according a letter from Gemstar Executive Vice President Stephen Kay to Youbet General Counsel Victor Gallo. The letter was disclosed by Youbet in a Sept. 10 filing with the Securities and Exchange Commission.

Youbet spokeswoman Ly Lau said the company “is not in a position to comment” about the suit. But in a letter to Gemstar that was filed with the SEC on Sept. 10, Gallo said that Gemstar told Youbet that it didn’t wish to own a majority stake. He notes that Gemstar has yet to fully exercise its options, which expire in March.

RiShawn Biddle

Swift Exit

Just four years ago, Gerard Klauer Mattison & Co. went on a hiring spree in Los Angeles, snapping up investment bankers, lawyers and partners to beef up its West Coast presence.

But Toronto-based BMO Financial Group, parent of Bank of Montreal, has spent the summer tearing GKM apart.

After BMO bought the New York-based brokerage firm in July for $44 million folding it into what’s now called Harris Nesbitt Gerard it sold two of GKM’s four local units to their managers and dissolved two others, doing away with between 25 and 30 employees.

In the past month, GKM Advisors, a money management firm formed in 1999, was sold back to its founders, while GKM Ventures, a $50 million venture capital fund, became independent.

But GKM’s local entertainment and media group and some of its investment banking operations have been dissolved. Now several of the entertainment players have found new homes.

Ron Silverman, the entertainment media lawyer who headed Gerard Klauer’s L.A. office, now is a managing director at Bel Air Investments Advisors LLC, a money management firm.

David Merritt, brought in to head GKM’s entertainment media advisory group, and two senior investment bankers, Larry Lewis and Ronald Hohauser, have joined investment bank Salem Partners, which was founded in 1999.

Merritt, who served for a year as chief financial officer to Michael Ovitz’s Artists Management Group, spent the previous 24 years at accounting firm KPMG LLP.

Another member of the entertainment division, Joseph Woolf, now heads the entertainment banking unit of Citibank in Los Angeles.

Several former GKM analysts stayed in the L.A. office to work for Harris Nesbit Gerard, including wireless analyst John Bucher and entertainment industry analyst Jeff Logsdon.

Kate Berry

Home Sweet Homes

Locally based homebuilders KB Home and Ryland Group Inc. were among three national homebuilders whose bonds garnered a “buy” rating in a report released last week by Bank One Capital Markets, a unit of Bank One Corp.

In its annual Homebuilding Handbook, Chicago-based Bank One said KB Home’s strong presence in an entry-level home market that’s unlikely to crash in a downturn along with its strong cash flows are the primary reasons for its positive grade.

Bank One gave Beazer Home USA Inc. bonds the third “buy” rating (out of nine builders rated) while granting “hold” ratings to Lennar Corp. and others. In July, Lennar and an affiliate agreed to buy Newhall Land & Farming Co. for nearly $1 billion in stock. Toll Brothers Inc., based outside of Philadelphia, received the lone “sell” rating.

Danny King

On Appeal

A lawyer for San Vicente Group, the bankrupt venture fund whose shareholders ousted management last year, said the company will appeal an L.A. Superior Court judge’s decision to pay attorneys’ fees for former managers.

San Vicente’s estimated 100 shareholders alleged that company executives, including co-CEOs Christopher “Kit” Jennings and Jay Matulick, granted themselves “golden parachutes” and breached their fiduciary duty by enriching themselves at the expense of shareholders.

The lawsuit claims board members never paid for $8.2 million of shares that were bought back from two of the venture firm’s companies GlobalNetFinancial.com and New Media Spark, Plc which had ties to San Vicente’s old management team.

After a two-month trial in March, an advisory jury suggested that San Vicente Group be awarded $622,000 in damages. But Judge Anthony Mohr of the court’s complex litigation department instead ruled in favor of the defendants.

No judgment has yet been entered, said Eric Maier, a lawyer for San Vicente Group at Gibson Dunn. When it is, the company will appeal, he said.

The current management group, made up of dissident shareholders, did manage to return $23 million to investors after ousting management last year. But the legal fight has been costly.

“By virtue of them spending so much on their legal fees, they’ve become the firm’s largest creditor,” said Peter Fuhrman, San Vicente’s current chief executive.

Kate Berry