WAS CHURCHILL ACQUISITION A SMART MOVE? YOUBET
Thursday, November 19th, 2009By Ray Paulick
A number of people I respect most in the Thoroughbred industry consider Churchill Downs Inc. CEO Bob Evans to be the smartest man in the racing business. Last week’s $126.8 million stock and cash acquisition of youbet.com, which also includes the totalizator company United Tote, only strengthens that assessment.
With the deal, which won’t close until sometime in the first half of 2010, CDI will own roughly half of the Advance Deposit Wagering market share. According to a presentation made by youbet.com at an investment bank conference last month (click here to read the presentation), youbet.com and TVG are the market leaders, with about 29% market share each, followed by the Churchill Downs-owned TwinSpires at 21% and Magna Entertainment’s XpressBet at 14%.
The current North American ADW market is roughly 14% of the $14 billion expected to be wagered on horse racing this year. It has been growing steadily, but not nearly as quickly as online transactions in other businesses such as event ticketing, travel, or music. It is widely viewed as the only current growth sector in racing. The growth of online wagering is in Evans’ sweet spot.
ADW wagers are also more profitable for a company like CDI than other types of bets, including those made on-track, especially when they are made at one of the tracks the company owns (Churchill Downs, Arlington Park, Calder, Fair Grounds).
So the acquisition of youbet.com looks very much like a win for CDI shareholders, because of the anticipated jump in both revenue and earnings, stemming from the bigger share of the ADW market and the reduced costs of personnel, marketing, technology, etc that Evans discussed in a conference call following the deal. It also gives the company a stronger technology platform than it has with TwinSpires. CDI’s purchase of AmericaTab from Bloodstock Research Information Services jump-started the company’s ADW business, which it was slow in developing. “I’ve been pretty impressed by the technology capabilities of the youbet organization,” Evans said in the Nov. 13 conference call.
The United Tote part of the deal makes sense, too. United Tote currently has contracts with Churchill Downs, Keeneland and the New York Racing Association tracks, but not with CDI-owned Arlington, Calder, Fair Grounds, 19 off-track betting parlors and TwinSpires—all of which use AmTote. Look for United Tote to pick up those contracts either as existing deals expire or buyout clauses are used.
There is the potential for pushback from some of United Tote’s current customers who might fear that Churchill Downs is becoming too powerful, but the upside to the ownership of United Tote far outweighs any downside. Also, as Evans said, United Tote might be able to improve tote system stability, performance and wagering integrity. If that occurs, it’s good news for the entire industry and especially for horse players, who have serious concerns about the integrity and dependability of the current wagering systems.
Of course, there could be some losers in this deal. As CDI gains more market share with its ADW company, it will wield even more clout than it currently carries in contract negotiations with horsemen around the country through TrackNet Media, which negotiates its simulcast contracts with wagering outlets. That could reduce purse revenues from ADW wagers even more than the already-too-low levels that currently exist.
The other obvious losers will be some employees at either TwinSpires or youbet.com, but that’s pretty standard in corporate mergers and acquisitions. There will be plenty of corporate carnage, either at the youbet.com offices in Woodland Hills, Calif., at CDI’s Louisville, Ky., headquarters or its Silicon Valley “digital think tank.”
One of the unanswered questions of Churchill’s acquisition is whether youbet.com will continue to operate in “gray” states where Advance Deposit Wagering is neither expressly legal or illegal and if TwinSpires will move into those states. In the past, youbet.com recruited customers in states where other ADW companies, including TVG and TwinSpires, did not conduct business.
One final note about the deal. Youbet.com executive chairman Michael Brodsky will join the CDI board of directors, a move that some insiders greeted with a yawn. Neither Brodsky or youbet.com’s largest shareholder, Hyatt Hotel mogul Jay Pritzker, were viewed as visionaries in the online gaming world. They both held onto longshot hopes that youbet.com would somehow, with approval from Congress, be able to move into the sports betting or online casino gaming business.
When that didn’t happen, their energies shifted toward selling the company, something they managed to accomplish.
But it looks to me like CDI and Bob Evans got the better end of the deal.
Copyright © 2009, The Paulick Report
Savvy businesses recognize value. Advertise in the Paulick Report.
Sign up for our Email Flashes to get the latest news, analysis and commentary from Ray Paulick