Kind Of A Big Deal–Patriarch Partners

Beverage Marketing USA, maker of AriZona Iced Tea, this week became the last large, successful, privately-held beverage companies to take on outside financing. Coke had been salivating over it for years — courting reticent entrepreneurs John Ferolito and Don Vultaggio — but it ultimately became more of a catalyst than a captor.

After Coke paid a 20X EBITDA multiple for Glaceau, maker of VitaminWater, around 15 months ago, BMU’s owners hoped they could get at least $1 billion for their business. At the time, sources estimated the uber-private AriZona had around $300 million in revenues. (If anyone can offer a more recent figure, please pipe up.)

But instead of a triumphant, exit to the reigning industry titans, the company sold a stake to a distressed investor, Patriarch Partners. Quite frankly, I am surprised a private equity firm would buy AriZona, and here is why.

Beverage companies typically pass through the hands of private equity firms during very early stages (see: VitaminWater and TSG Consumer Partners, FUZE and Castanea Partners, Naked Juice and North Castle Partners). The PE firm readies the fast-growing entrepreneurial company for sale to Pepsi or Coke, both of which haven’t created too many successful brands on their own in awhile.

In AriZona’s case, the company has passed its early growth period. AriZona got started in 1992, and the brand’s popularity peaked years ago as soda alternatives flooded the market. The founders’s reluctance to sell led suitors to turn elsewhere: Coke eventually purchased a smaller competitor of AriZona called Honest Tea. With that deal, Coke canceled its distribution deal with AriZona. As everyone in the beverage industry knows, distribution is everything.

So Patriarch, with no readily accessible distribution network to share, must have a good plan to revive AriZona. I spoke with the firm’s rep, who said the firm’s CEO and founder, Lynn Tilton, “really gets her hands dirty.” (Unrelated side note: If the firm is led by a woman, why not “Matriarch”?)

Patriarch is somewhat press-shy, as I’ve only heard of them once—when their portfolio company American LaFrance went bankrupt earlier this year. If I get lucky I may speak with Tilton next week to get more detail on the firm’s plans for AriZona. I’m just as interested in learning about the deal’s capital structure. According to the press release, Patriarch’s stake comes out of John Ferolito’s 50% holding, but it doesn’t say if Ferolito has exited entirely. This makes the difference between Patriarch’s status as a minority or control investor.

One last thing: according to AriZona’s Web site, the company has become the number one ready-to-drink tea maker “by beating up on some of the world’s heavyweight corporations like Pepsi and Unilever, Coca-Cola and Cadbury.” Looks like the guys at BMU are betting AriZona Iced Tea drinkers don’t know about their former distribution deal with Coke!
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In other beverage news, keep an eye out for Hansen Natural. This week Nelson Peltz revealed a stake in the beverage company, best known for its Monster Energy Drink. Industry insiders (and beaten-down shareholders) believe, or at least hope, Peltz will pressure the company to sell to Pepsi or Coke, both of which have stumbled in the energy drink business. Monster is the only American product to come close to Red Bull’s dominance of the market—Pepsi’s Amp has been lackluster and Coke’s offerings in the sub-sector are declining.

With AriZona out of the way (at least for now), Coke and Pepsi’s focus may shift to energy. Hansen’s offerings include iced teas, as well as juices and soda; the general consensus is that any acquirer would be interested in Monster and very little else.