Dover Motor Sports Merger Cancelled. What's Next?

Includes: DDE, DVD
by: Mariusz Skonieczny

When I first learned on September 27, 2010, of the proposed Dover Motorsports (NYSE:DVD) merger with Dover Downs Gaming & Entertainment (NYSE:DDE), I was a bit shocked. Why would the management want to recombine two companies after splitting them several years ago? After communicating with several shareholders, it became clear to me that most of them were opposed to the deal. It was not surprising, considering the price the management offered for shares of Dover Motorsports. After squandering money on lawyers, Dover’s management decided to call the merger off. Henry B. Tippie, Chairman of the Board of Directors of both Dover Motorsports and Dover Downs Gaming & Entertainment, said that the reason for the cancellation was shareholders’ opposition.

This is the first time in a long time that I see the management doing anything that would actually benefit shareholders. Yes, they didn’t have to create this situation in the first place by announcing the merger, and there were much better ways of finding out whether shareholders would like the deal (like picking up the phone and calling Mario Cibelli), but it was a move in the right direction.

Now the question remains – what is next? I wish I could make an educated prediction but I can’t because so far I have been surprised every time. However, the only two options left are to do nothing or sell the company.

Let us explore the possibility of doing nothing. Currently, the company is losing money and the situation has worsened with the recession. While the overall economy seems to be improving, the economy of NASCAR is lagging behind because many NASCAR fans are in the lower-middle class income bracket. These people are having the hardest time finding jobs, and therefore, are not attending races in the same numbers as before. I don’t doubt that at some point in the future, the economic situation will improve even for those fans who are struggling with unemployment, but the problem is that Dover Motorsports might not have the luxury of waiting it out. Because the company carries debt on its balance sheet, it has a certain responsibility to its lenders, who are not too happy with borrowers who lose money year after year. Recently, Dover was at risk of breaking certain financial covenants, but fortunately lenders allowed the company to amend them. Combining the bad economy with Dover management’s not-so-great track record of creating shareholder value, this option does not look too appealing.

How about selling the company? This is what shareholders would want management to do, but management seems to be completely opposed to it. They say that they want to sell the company but when it comes to making it a reality, the price is never high enough. But, they didn’t seem to have a problem with offering to buy out the current shareholders for less than $2 per share when they announced the merger between Dover Motorsports and Dover Downs. Being a shareholder of Dover Motorsports, selling the company would definitely make more sense to me. Unfortunately, I don’t believe that Dover Motorsports management cares much about what I, or other shareholders, think. The cancellation of the recent merger is an encouraging sign, but what the management will do next is unknown. Your guess is as good as mine.

Disclosure: The Author Owns DVD.