Airing Dirty Laundry Costs YouBet Investors $9 Million
YouBet (UBET) investors gave up $9 million (7.5%) in market cap today, after the company started a game of chicken with TrackNet Media and was forced to back down. The action started last night, when YouBet issued a press release warning that they could lose access to the Kentucky Derby, over vendor hardball. TrackNet Media responded with their own press release accusing YouBet of trying to force them to negotiate when they hadn’t worked out other contracts.
Out of the gates, the stock traded down, but once the analysts got involved, it was a shark feeding frenzy! Ryan L. Worst with Brean Murray, Carret & Co told investors that “TrackNet’s content would shave a penny or two from Youbet’s second-quarter profit. That represents 20 percent to 40 percent of the profit analysts polled by Thomson Financial forecast for the quarter.” Todd Eilers with Roth Capital also downgraded the stock and warned of soft profits. To make matters even worse, AllofHorseRacing.com jumped all over the PR blunder, in order to promote their own support for the Kentucky Derby.
After seeing the market’s response, YouBet issued a rushed press release announcing that they had extended their agreement with Churchill Downs (CHDN) to 2010. This is important because CHDN represents half of the TrackNet equation, but it did little to soothe investor’s nerves (although the stock did recover a bit over the remainder of the day.) They company also denied that the issue would impact their earnings because it would be offset by savings in marketing costs. 
Whether or not it will impact earnings remains to be seen, but the public outburst does tell us something about YouBet’s negotiating position right now and things do smell a little desperate. I’m still familiarizing with the history of each stock in the Minus index, but luckily for me, there are others, who know more about this. Marshall Graham at Equinometrics offer an excellent hypothesis on what really might be going on.
“For the past few years America TAB and Youbet have operated offering both TVG and MEC tracks. Why the sudden change? My guess is that TrackNet intends to squeeze all ADWs out. If Empire Racing (which includes Magna and Churchill Downs) get the New York tracks, it is all over for Youbet.”
All in all, it was an ugly day that really didn’t need to happen. YouBet could have continued their negotiations with TrackNet privately instead of airing the dirty laundry. As a result, investors have lost some measure of confidence and they’ve damaged a key relationship with the blunder.