North Carolina is considering selling its warehousing and sales of state-run liquor stores that generate hundreds of millions in annual revenue, according to multiple sources and confidential documents obtained by peHUB.com. However, any deal would have to overcome a partisan battle between a GOP-led statehouse and a Democrat governor.
A source familiar with the business said its 2010 gross revenue including taxes totaled $775 million—which, under private ownership, would increase—but detractors from proposals to sell the state’s liquor business argue as little as $300 million could be won in a sale.
Scott Balice Strategies was hired late last year to evaluate how North Carolina could sell off the business. Documents prepared by the firm and obtained by peHUB provide a number of scenarios in which the state can better monetize its liquor warehousing and retail assets. Included in scenarios outlined by the advisor is the “full privatization of retail and wholesale” operations. This would remove state-run and local boards from the process, saving the liquor business in headcount costs. Other proposals devised by Scott Balice Strategies would scale back state-affiliated management’s role, reducing—but not eliminating—its position in distribution and warehousing.
Under the state’s current model, distilled beverage makers provide liquor to more than 150 state-run operations in the Alcoholic Beverage Control authority, which also sells liquor. But, soon, North Carolina will face a multi-billion-dollar budget deficit and, already, its state-operated liquor operations are facing sliding profits and growing criticism. Still, North Carolina Gov. Bev Purdue recently publicized her opposition to the sale of state-run liquor operations, arguing its potential price tag will not go far enough for the state.
“[Purdue] says the most the state could get by privatizing the system is about $300 million,” a private equity source who spoke with peHUB and was familiar with the government’s deliberations said. “The value could be dramatically higher if the entire wholesale/retail concession were to be leased or sold to a private equity firm,” he added, saying the governor’s estimate was too low. “The add-backs to Ebitda would be huge from the elimination of the local boards and cronyism.”
Another source said North Carolina needs to expand its liquor retail presence and that private backing will boost the business’ footprint—something the governor also opposes. There are approximately 10,000 outlets at which consumers can acquire beer and wine, but only a few hundred liquor stores in the entire state.
“It is an asset that needs to be examined,” the source said.
Scott Balice Strategies has a history of working with governments in need of a quick fix to debt situations. In 2010, Harrisburg, Pa., hired the firm to provide the jurisdiction with financing solutions and the advisor, prior to that, was also hired by New Jersey Transit to evaluate its parking business, according to its Web site. Sources that spoke with peHUB.com said that, despite Gov. Purdue’s protesting the potential sale of North Carolina’s liquor business, when the legislature confronts its deficit later this year it will renew consideration for an exit from the warehousing and distributing assets. Further, they added, it is likely other states’ businesses that operate in the space could be jettisoned to the auction block, as these assets generate recurring revenue investors seek.
One recent investor in the alcohol business on the East Coast should be pretty familiar: Warren Buffett. Last year, Berkshire Hathaway’s McLane food distribution subsidiary acquired the Empire Distributors, a Southeast alcohol wholesaler. Other recent buyers in alcohol include KKR, which bought into China’s biggest liquor store chain in late 2006, and KPS Capital Partners, which has concentrated on brewing assets rather than liquor.
North Carolina is among just a handful of governments with state-owned retail and wholesale liquor operations; along with Virginia, Alabama and Pennsylvania, the Balice report states. The North Carolina Alcoholic Beverage Control board did not acknowledge requests for comment by press time.