12/01/2005 12:00AM

Youbet.com agrees to buy United Tote for $49 million


Youbet.com, the horse race wagering company, has reached an agreement to buy United Tote, one of the four bet-processing companies in the U.S., in a transaction valued at $49 million, Youbet announced on Thursday.

The acquisition, which is scheduled to close in 60 days provided that Youbet raises the cash to complete the acquisition, would further diversify Youbet, which earlier this year bought an offshore rebate shop, International Racing Group. Of the $49 million purchase price, $34.2 million will be paid by Youbet in cash. Youbet will also take on $14.4 million in United Tote debt.

Youbet will need to raise money through an equity offering in order to close the deal, according to Chuck Champion, the chief executive officer of Youbet. According to the company's financial documents, Youbet had $19.1 million in cash at the end of September, $15 million short of the cash requirement for the United Tote acquisition. The company plans to announce details of a stock offering shortly, Champion said.

Bet-processing companies like United Tote provide the networks and equipment that take wagers, commingle the bets into common pools, and calculate payoffs. The companies typically receive 0.25 percent of each bet as a fee, although that number can increase depending on the level of services.

United Tote's largest customers are the tracks owned by Churchill Downs Inc. and the New York Racing Association. According to Youbet, United Tote processed $7 billion in wagers in 2004, including its operations in international markets. Approximately 90 percent of that figure came from the domestic market, Champion said, for a 35 percent market share in the U.S. Annual handle in the U.S. is approximately $15 billion.

According to financial data provided by Youbet, United Tote had $1.2 million in net income in 2004. Through the first nine months of 2005, the company has lost $60,158, according to the data.

Champion said that Youbet was attracted to United Tote because "it's considerably more than just a tote company," citing United Tote's development of gaming terminals and touch-screen terminals for use at racetracks. He also said that Youbet would seek to improve bet-processing technology and develop new products that would maker it easier for bettors make wagers on horse racing, perhaps by allowing Youbet customers to use money in their online accounts to pay for bets at racetracks.

"It's my ardent hope that what comes out of this is improved technology and improved customer service," Champion said.

The U.S. bet-processing network has been targeted for improvement by many racing companies since late in 2002, after an employee of the bet-processing company Autotote - which is now known as Scientific Games - rigged a bet on the Breeders' Cup pick six. Although a consortium of tracks, including Churchill Downs, NYRA, and Magna Entertainment, have been working on a concept to improve the technology, little progress has been made.

Last year, United Tote scored a coup when NYRA selected the company as its bet-processing partner, replacing Scientific Games, which had been NYRA's tote supplier for 25 years.

Youbet has a hub in Oregon that is currently maintained by Scientific Games. Another Youbet hub in California is maintained by Amtote, another competitor to United Tote. Bet-processing services for Youbet's offshore rebate shop IRG, which is based in Curacao but will have its hub in Oregon, will be provided by United Tote. Champion said that Youbet does not anticipate severing any existing relationships with its bet-processing providers because of the acquisition.

Earlier this year, Youbet said that expenses associated with network operations in the third quarter rose 66 percent, to $1.5 million, compared with the third quarter in 2004, largely because of "higher tote fees," both at Youbet and IRG. In the third quarter, handle was $151.3 million, compared with $83.7 million in the third quarter of 2004.