Youbet hits jackpot after TVG folds hand on stock purchase.

YOUBET.COM Inc. made a risky wager in 2001 when it granted Gemstar-TV Guide International's TVG Network the right to buy 51 percent of its shares, in exchange for fights to rebroadcast horse races over the Internet. The partnership didn't go so well--in February, the two sides settled a legal battle over control of Youbet, but only after a bitter proxy contest.

Now, Youbet is finally seeing a payoff, in the form of a booming stock price. On March 31, Youbet announced that TVG had decided not to exercise its warrant and would instead accept 1 million shares of Youbet common stock, a fraction of the 21.6 million shares to which TVG was entitled. TVG already owned about 4 million shares of the company.

In the five trading days following the announcement, the stock of Youbet increased 54 percent, to $5.60 per share on April 7 from $3.64.

"We had assumed dilution of the shareholder base, and when TVG decided not to exercise the warrant, it removed the uncertainty about investing in the stock," said Todd Eilers, a gaming analyst with Roth Capital, which upgraded Youbet to a "strong buy" on April 2. "With the uncertainty removed, it opened up the door for a lot of people to come in."

Eilers said he is not sure why TVG decided not to exercise the warrant but believes that the company did not want to pay $36.5 million to acquire 21.6 million shares of the horse-wagering company--even if the price was a discount from Youbet's market price.

"They were probably not willing to pony up that amount of capital," he said.

Charles Champion, chairman and chief executive of Youbet, said the company had planned two future strategies depending on TVG.

He said TVG's decision to not exercise the contract has more upsides because the higher stock price might attract institutional investors and fund managers. Coghill Capital Management, JP Morgan Chase & Co. and Barclays Bank are currently Youbet's top institutional investors, with each holding more than 1 million shares.

"There are certain limits on funds on what they can invest in if the stock is under a certain amount of dollars," Champion said. "We have reached the magic markers now that we've cleared the $5.25 level."

Champion said the company now plans to go forward with partnership and acquisition plans, some of which might require additional capital. The company will announce those plans in about a month, he said.