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LOUISVILLE, Ky. — Churchill Downs Inc., which counts the Kentucky Derby in its stable of businesses, staked out a bigger share of the Internet wagering sector with its deal to buy online rival Youbet.com.

The racetrack operator, steeped in racing history with the Run for the Roses held each May at its namesake Louisville track, is betting that online wagering will keep up a fast pace in an otherwise sluggish industry.

The deal announced Wednesday was valued at about $126.8 million.

It would position Churchill at the front of the pack in online and phone betting, called advance deposit wagers, or ADWs, by consolidating its own TwinSpires.com account-wagering site with Youbet.

Churchill Downs shares fell 82 cents, or 2.6 percent, to $30.75 in trading Thursday.

At a time when on-track wagering on live racing is relatively flat, Internet wagering will account for nearly 14 percent of all betting on U.S. thoroughbred racing in 2009, up from about 10 percent last year, Churchill executives said in a conference call Thursday to discuss the acquisition.

Looking ahead, the company said that placing bets with the click of a computer will become even more appealing to people looking to cash a winning ticket on their favorite horses.
“Should the ADW channel follow in the path of other consumer goods, in terms of the percentage of transactions that occur online, there will be substantial future growth in ADW wagering,” Churchill President and Chief Executive Officer Robert L. Evans said.

The consolidated operations will “try to capture the best of both and put those together,” Evans said.

In 2008, Youbet reported handle, or amount of money wagered, of $438 million and revenue of $85.8 million. Its handle was up 13 percent and revenue was up 8.6 percent in the first nine months of 2009 compared with the year-ago period, Evans said.

Youbet also provides horse racing content to CBS Sports.com and ESPN.com.

The deal was approved by the Churchill and Youbet boards. It still must clear regulatory review and win approval from Youbet shareholders. Churchill said it expects the deal to close in the first half of 2010.

Youbet shareholders would get 0.0598 shares of Churchill stock plus 97 cents per share cash for each share of Youbet stock owned. If the deal closes, Youbet shareholders will own about a 16 percent stake in Churchill.

Besides its namesake track in Louisville, Churchill Downs owns and operates three other tracks in Florida, Illinois, and Louisiana, along with off-track betting facilities.

Evans said the deal’s stock-cash mix gives Churchill the flexibility to look for other ways to expand.

“We wanted to preserve the balance sheet to do other deals going forward,” he said. “We’ll continue to look around and see what’s out there and hopefully do good stuff.”

He said the combined Twinspires and Youbet business “will be well positioned to pursue other online business opportunities should they develop.”

Youbet President and Chief Executive Officer David Goldberg said Thursday the deal will create an operation with “the technology, know-how and channel access to be a market innovator” in horse racing.

“Nothing can replace the electricity of being at the track,” he said in a conference call. “However, the recent growth in ADW proves there is significant demand to wager online.”

Ryan Worst, an analyst at Brean Murray Carret & Co., said the deal “makes sense.”

The consolidated Youbet and TwinSpires operations will account for about 40 percent of an approximately $1.8 billion Internet wagering market on horse racing in the U.S., he said. He predicted that the online segment of thoroughbred race wagering “will continue to grow significantly for the next several years.”

Other big players in the account-wagering business include TVG and XpressBet.

The amount wagered on thoroughbred racing in the United States totaled $13.6 billion last year, down from $15.2 billion wagered in 2003, according to the Jockey Club. Ontrack wagering at those events in 2008 totaled nearly $1.5 billion, compared with $1.9 billion in 2003, the statistics showed.

Worst said that Churchill’s balance sheet remains strong, “leaving it in the enviable position to pursue additional growth opportunities.” He reiterated his buy rating for Churchill stock.