Nantucket Nectars: The Exit · Prep

The Professor's Questions

The founders of Nantucket Nectars are trying to decide whether, to whom, and how to sell their company.

What are the pros and cons of staying independent?
If management decides to sell a majority stake (but not all of) the business, what would be their role afterwards? Is this a good outcome?
How should they identify and work with prospective buyers? Which of the potential acquirers listed in Exhibit 6 looks best? How should they orchestrate the process? Do they need an investment banker?
How much is Nantucket Nectars worth? To whom? Why?
What should Tom and Tom do?

My Answers

Q1. Pros and cons of staying independent

Short answer: staying independent is a real option, but it is a bet that two young founders with a 30% gross margin and no buying power can win the supermarket shelf against Coke, Pepsi and Seagram — in a category whose growth is slowing from ~38% a year to ~9%. The upside is theirs alone; so is the risk.

Pros

The company works. Revenue $233K (1991) → $29.5M (1996), +92% last year. 1995 was the first profitable year; 1996 EBITDA $969K. Standalone, Exhibit 7 already values it at $34–58M.
Huge untapped channels. Supermarkets sell 55% of New Age beverages but only 1% of Nantucket Nectars. Midwest and West are 9% each. If they can get in, the runway is long.
They keep what makes it special: the story, the no-dress-code culture, the two Toms on the radio, "eye to thigh" merchandising, 27 flavors in three years. All of this is hard to copy and easy to kill.
Control. No one tells them to swap cane sugar for corn syrup. Egan has shown that a 50% outsider can be hands-off; they already live with that.
No acquirer stock risk. They said they do not want to hold the stock of a different company. Independence avoids that.

Cons

Margins are the worst in the category. Gross margin 30.5% vs the 34.3% the model needs; EBITDA 3.3%. Four times the juice, cane sugar, no futures contracts. In the bad 1995 cranberry harvest they got zero cranberries because Ocean Spray controlled the supply. That does not get better by staying small.
The supermarket needs scale they do not have. Supermarkets want multi-serve (the 36oz bottle), shelf power and slotting money. Big players compete by blocking small brands off the shelf. 57 salespeople cannot buy their way in.
The Cola Wars are coming to New Age. Coke, Pepsi, Seagram want to be "total beverage companies." Pepsi just dropped Ocean Spray to enter juice itself. Over 100 companies have launched New Age drinks. Consumers have no switching costs.
Growth is decelerating. Exhibit 4: alternative fruit drinks grew ~38%/yr 1991–95 and are projected at ~9%/yr 1995–2000. The standalone case still assumes 20–25% growth — that means taking share, not riding the wave.
Capital. They were undercapitalized for four years, employees unpaid for a year, founders unpaid for three and a half. Going national needs money. Raising it now means another Egan-style dilution, at a moment when strategic buyers would pay ~3x the standalone number.
Concentration. The two founders' entire net worth is in one juice brand in a segment some analysts call a fad. Egan, 50% owner, also has no liquidity.
The window is external and short. Interest exists today because of a magazine mistake and because Ocean Spray loses Pepsi in May 1998. Next year the buyers may have solved their problems another way.

Q2. Majority sale: their role afterwards — a good outcome?

Their role: after selling a majority stake, Tom and Tom become minority shareholders who are also employees. On paper they still "run the company." In reality, the big decisions move upstairs: capital, distribution, pricing, product formula, hiring budgets, where the brand sits in the acquirer's portfolio. Their day-to-day job becomes keeping the story, the culture and the 57-person sales force alive inside someone else's organization.

Whether this is a good outcome depends on three things, and all three are written in the contract, not in the handshake:

Why the buyer is buying. If the buyer wants the brand, the story and the 18–34 access (things it cannot build), the founders are the asset and will be given room. If the buyer wants to plug a distribution hole or kill redundancy (Triarc with Snapple/Mistic), the founders are a transition cost. Quaker–Snapple is the warning: new ads, new distributors, CEO fired, $1.4B gone in under three years.
What they keep. A meaningful minority stake only has value if there is a way out: a put/call at a formula price (say, a fixed multiple of EBITDA in years 3–5), not "we'll see." Otherwise they hold illiquid paper in a company they no longer control — the exact thing they said they did not want. Cash for most of the stake today, a rollover for the "second bite."
What they are promised in writing. An autonomy charter: brand and marketing control, keep the Nantucket office and the dress code, a say over distributor changes for a fixed period (anti-Snappleization), a committed growth budget, a retention pool for the 100 employees. Plus a defined role and title, and the right to leave with the put intact.

Is it good? Yes — if the buyer is one that needs them (Ocean Spray fits best: private, culturally similar, needs youth and single-serve, has an Egan-like hands-off history to point to). They have lived with a 50% outside owner for four years and it worked because Egan did not meddle. A majority sale is Egan 2.0 with a distribution network attached. Not good if it is Pepsi (history of "downscaling" quality, Lipton Brisk) or any buyer whose plan is to fold them in. Then they should sell 100%, take cash, and leave with the story intact.

The honest cost: they will not be the boss anymore. Their list of fears — losing the entrepreneurial spirit, departmentalizing, "will consumers still enjoy the story if a big public company owns it?" — is real. A contract can slow that down; it cannot stop it forever.

Q3. Identify and work with buyers; who looks best; orchestrate; banker?

Who to talk to. The right list is not "who is big" but "who has a problem this company solves right now":

Ocean Spray — loses ~$200M of Pepsi-handled single-serve distribution in May 1998 (19% of $1.05B). Needs a single-serve sales force and a younger brand. Private. Knows the Toms. Biggest berry buyer in the world (the cranberry problem disappears). Five captive bottling plants.
Pepsi — just dropped Ocean Spray to enter juice itself; insiders think it used the deal to learn single-serve New Age. Deepest pockets. Needs a brand to enter with. Risk: downscales quality for volume.
Triarc — just bought Snapple ($300M) and owns Mistic and RC; "best platform to grow the business over the next two years." Risk: redundancy → distributor purge → Snappleization; and it just spent $300M.
Tropicana (Seagram) — a juice company that wants juice cocktails without risking its own brand equity. That is literally item 5 on the founders' own asset list.
Keep a fifth and sixth in the room for tension (Coke, Cadbury, Quaker's other brands) even if they are unlikely to win.

Which looks best? On fit, Ocean Spray. Three reasons, all structural:

Highest urgency = highest willingness to pay. A $200M hole with a May 1998 deadline is the best thing that could happen to a seller.
Complementary, not redundant. Ocean Spray is strong in supermarkets, especially the Northeast; Nantucket Nectars is 93% in "other" small outlets and 1% in supermarkets. Each has what the other lacks. Fewer overlaps means fewer distributors fired, fewer people cut, less Snappleization.
Private, culturally close, hands-off history possible. Less disclosure, less quarterly pressure. The founders can actually stay.

Triarc is the best growth platform but the worst integration risk; Pepsi is the best pocket but the worst cultural fit. Use both to make Ocean Spray pay for its urgency.

How to orchestrate. Today they are improvising — splitting up to meet Ocean Spray and Pepsi on the same afternoon, hiding meetings from employees. That is a leak waiting to happen (employees, distributors, retailers). Replace it with a controlled, confidential auction:

One short information memorandum; one data room; NDAs before anything is shared.
A timetable: indicative bids in ~4 weeks, management presentations with 3–4 bidders, final bids with mark-ups of a draft contract. Set the clock around Ocean Spray's May 1998 deadline — that is the seller's leverage.
Ask bidders to bid on structure as well as price: cash vs stock, % acquired, founders' role and autonomy, employee retention, distributor commitments, put/call on the rollover.
Keep Egan (50%) aligned in advance on price floor and on whether he exits fully. A split cap table at the final hour kills deals.
Founders keep the relationship conversations — the buyers are buying their story — but not the price conversations.

Investment banker? Yes, for this one. Reasons: (a) a $100M+ deal with four or five bidders is a process, and two founders running a company growing 90% a year cannot run it part-time; (b) a banker lets the Toms stay "good cop" and keep their future bosses as friends; (c) confidentiality and discipline — bankers know how to keep five bidders in the dark about each other; (d) they know the bidders' corporate development people and what each can pay; (e) Egan is a one-time 50% investor, not a process manager. Cost: typically 1–2% of value — ~$1–2M on $100M — a bargain if competition moves the price 10% (~$10M) or protects the structure. Pick a boutique with beverage M&A experience, pay mostly on success, keep a short tail, and make sure the banker is the founders' banker, not Egan's.

Q4. How much is it worth? To whom? Why?

There is no single number. Exhibit 7 gives two, and the gap between them is the whole case.

Standalone (stay independent, 20–25% growth, 34.3% gross margin flat): $34M–$58M; midpoint at 14% / 10× ≈ $47M. That is ~1.6× 1996 revenue and ~48× 1996 EBITDA — the value is almost entirely in future growth, not in today's earnings.
Strategic sale (25–30% growth from supermarket access, gross margin to 37.3% from 10–20% COGS savings, operating margin to 13%): $106M–$176M; midpoint ≈ $144M. About 3.1× the standalone number.
The ~$97M gap is synergy. It does not belong to Nantucket Nectars; it only exists inside a buyer. The negotiation is about how much of it the seller can take. A buyer's opening anchor will be "standalone plus a little." The seller's job is to make competition push the price into the synergy zone. A realistic target: capture half or more of the gap — $90M–$110M for 100% of the equity (before adjusting for the small debt behind the $301K of interest).

To whom is it worth the most?

Buyer	What NN is worth to them	Why
Ocean Spray	Highest	Fills a $200M, May-1998 hole in single-serve distribution; adds a youth brand; biggest berry buyer → largest COGS synergy on a product that is 4× juice; private, can pay for strategy not quarters. The founders' own list ("last good access to single-serve distribution", "vehicle to expand into juice cocktails without risking own brand") was written for them.
Pepsi	High on paper, but discounted	Could pay the most in absolute terms, but it can also build or buy elsewhere, and NN would be a rounding error ($30M in a company whose brands are measured in billions). Its downscaling history lowers what the founders are worth to it — it wants the shelf, not the story.
Triarc	Medium-high	National single-serve network means fast growth, but Snapple/Mistic overlap means part of the value is cannibalized and distributors get cut. Just paid $300M for Snapple; may push stock, not cash.
Tropicana (Seagram)	Medium	Clean brand-extension logic into juice cocktails; less urgency than Ocean Spray. Useful bidder for tension.

Why the numbers swing so much. This category reprices violently: Snapple went $1.7B (1994) → $300M (1997) on roughly the same brand. Value here is not an attribute of the company; it is a function of who needs it on the day they sign. Which is exactly why the time to sell is when a buyer's need is at its peak, not when the founders feel ready.

What this means for the owners. Egan holds 50%, the Toms 50% together. At $100M of equity, Egan turns $600K into ~$50M (≈83×) and each founder's ~$8,500 half of the $17,000 becomes ~$25M. Those are the stakes on the table.

Q5. What should Tom and Tom do?

Sell a majority stake now, to Ocean Spray, through a short competitive process — and keep a minority stake with a contractual way out.

Concretely:

Decide to sell. The buyers' need peaks now (Pepsi–Ocean Spray split, May 1998). The category is slowing (38% → 9%). Margins are a structural disadvantage only scale fixes. The strategic value is ~3× what they can build alone, and the biggest part of that 3× — procurement, bottling, supermarket shelf — is exactly what they cannot do themselves.
Hire a boutique banker and run a 3–4 month confidential auction with Ocean Spray, Triarc, Pepsi and Tropicana. Price target: north of $100M for 100% of equity (i.e., more than half the synergy gap). Let Pepsi and Triarc be the pressure; let Ocean Spray win on fit.
Structure: cash for Egan's 50% and most of the founders' shares; the Toms roll ~20–25% combined into the new structure; a put/call in years 3–5 at a fixed EBITDA multiple; no public-company stock (they said they don't want it, and Ocean Spray is private anyway).
Governance in writing: the Toms run the brand as a separate unit from Nantucket; control of marketing and formula (no corn syrup); a 24–36 month moratorium on involuntary distributor changes; a committed growth budget; a retention pool for the 100 employees, especially the 57 salespeople who are the distribution asset.
Prepare for the day after. Say the honest sentence out loud: they will be rich, and they will not be the boss. Plan their own next chapter so the put is a choice, not a trap.

Cost of this choice: they give up the small chance that they alone build a $200M brand and keep all of it. They accept a slower, more corporate second act. Some of the culture will go.

Why not the alternatives:

Stay independent and raise growth money — possible, but they would be fighting Coke, Pepsi and Seagram for supermarket shelf with 30% gross margins and no procurement power, in a slowing category, with capital that dilutes them anyway. Snapple shows what the big players do to even the category leader.
Sell 100% for cash and walk — clean, but leaves the "second bite" on the table and makes the 100 employees' fate entirely someone else's problem. Right answer only if the winning bidder is Pepsi or a buyer who plans to fold them in.
Sell to Triarc for the growth platform — the growth is real, but so is the distributor purge. Their 57 salespeople and their distributors are the asset; Triarc is the buyer most likely to destroy it.