Los Angeles Business Journal: With gambling site on a roll, gemstar deals suit to Youbet

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 Crallo. 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.