Thursday, April 24, 2014
It's a sweet deal, no matter how you look at it.
STATE'S TAKE LAGS CONTRACT'S VALUE
Since 2004, the state has received $40 million in revenue sharing in addition to the $125 million Maine Beverage paid up front. The fair market value of the contract, however, was pegged at $378 million in 2009 by the financial services firm Deloitte & Touche.
And state-controlled prices that guarantee a gross profit of 36.8 percent of annual sales.
That's the business climate that the state of Maine created for Maine Beverage Co. in 2004, when the company paid $125 million up front for an exclusive contract to be the state's liquor wholesaler.
The 10-year deal has yielded a net profit -- after taxes, loan payments and other expenses -- of $110 million for Maine Beverage on sales of about $865 million. The company employs 10 people in Augusta.
Meanwhile, the state of New Hampshire continues to lure Maine shoppers with liquor prices that are as much as 40 percent lower, which costs Maine $10 million to $20 million a year in lost sales, according to Gerry Reid, director of the Bureau of Alcoholic Beverages and Lottery Operations.
The lucrative liquor contract was a product of the times -- when state officials were grasping for cash to close a $1.2 billion chasm between revenue and spending. Now, with the contract nearing an end, state officials are gearing up for a critical renegotiation of its terms. They say they're determined to cut a better deal this time and avoid the missteps of the past.
"We should be paying vastly less than the current contract," said Reid. "There will be no guaranteed profit margin going forward. The business is vastly simpler than expected, and the amount the state is getting is vastly lower than what it should be getting."
In addition to collecting more money from liquor sales, Maine officials are also hoping to lower retail prices by $2 to $7 per bottle to make the state more competitive with New Hampshire. The state also wants to pay higher commissions to agency liquor stores, said Reid.
Maine Beverage, owned by Massachusetts-based Martignetti Cos. and New York private equity firm Lindsay Goldberg & Bessemer, has not responded to numerous telephone and email requests for comment.
THE GOAL: 'FILLING A BUDGET HOLE'
Since 2004, the state has learned it has given away a big revenue stream in exchange for the upfront payment. Most people involved with the bidding or review of the contracts back then declined to comment on the 2004 transaction. Pieced from news reports and public documents, a picture emerges of a desperate time filled with late-night budget amendments and a privately negotiated compromise among the rival bidders.
In 2003, then-Gov. John Baldacci, a Democrat, faced a massive billion-dollar budget deficit and was weighed down by campaign promises not to raise taxes. To help bridge the gap, Baldacci decided to sell the state's wholesale liquor business.
The idea had been pitched in January 2003, by lobbyist and Baldacci fundraiser Severin Beliveau of Preti Flaherty Beliveau Pachios & Haley, according to news reports at the time. Beliveau, who originally floated the idea on behalf of a Wall Street private equity firm interested in the contract, did not return calls seeking comment.
The private equity firm, Lindsay Goldberg & Bessemer, which was created by former Morgan Stanley bankers, had sparked the idea for Baldacci, but the governor's staff felt the offer was too low. The firm had offered to buy the business for $125 million in cash, plus an annual royalty payment of 5 percent of liquor sales.
"We need money now, but we don't need money that badly," Rebecca Wyke, then commissioner of the Department of Administrative and Financial Services, told the Portland Press Herald at the time.
The idea of selling the liquor business had been raised and rejected before. In 1995, Rothschild Inc. proposed buying the wholesale liquor business for $243.3 million. At the time, the state's annual profit on liquor was $22 million and projected to decline. The beverage company Seagrams also contacted the administration of independent Gov. Angus King about buying the business.
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