Finance Case: Nantucket Nectars

Unit 3, Professor Martin Sinozich's Finance course, Nantucket Nectars: The Exit.

The last few pieces were all about how to build a company — Olay took its brand apart and put it back together, Belden transformed while profits were still rising, Bajaj guarded the gap between two purchases. This one runs the other way: the company has been built, and two founders in their early thirties have to decide whether to sell, to whom, and how. It's a story about "what it's worth," and the answer isn't in their own books.

Here goes — enjoy:

Case Summary

In the fall of 1997, Tom Scott and Tom First were sitting in a room they had never been in before. Five companies had expressed interest in buying part of Nantucket Nectars — Tropicana (owned by Seagram), Ocean Spray, Triarc, Pepsi, and one unnamed. What set it off is the interesting part: in July, Brandweek magazine ran a story saying Triarc was in acquisition talks with them. It was wrong — at that point they hadn't even formally met anyone from Triarc. But Ocean Spray and Tropicana read it, and within a few weeks Triarc and Pepsi came knocking too.

Every meeting was held away from the office, so that no employee would worry. The most memorable day had been a few days earlier: the two Toms ran so long with Ocean Spray that they were late for their second meeting with Pepsi. So they split up — Firsty stayed with Ocean Spray, Scott went to see Pepsi. Ocean Spray never knew there was a Pepsi meeting that afternoon. Tom Scott said they had learned everything on the job, under fire, but this was something entirely new.

The road here starts at Brown University. The two Toms met as freshmen and painted houses together on Cape Cod. Tom Scott later recalled that of the six guys, everyone wanted to be the boss except him and Tom First, who never fought over it — "we liked the whole more than our individual roles." After graduating they went back to Nantucket and started a "floating convenience store" called Allserve, delivering ice, beer and newspapers to yachts in the harbor, pumping out sewage, delivering groceries, doing laundry. Back then they didn't even sell juice.

In the winter of 1990, Tom First recreated a peach juice he'd had in Spain. That spring they blended it up, poured it into milk cartons and wine bottles — "whatever we could find" — and sold it from the boat. The first year they sold 8,000 cases, the second year 20,000. The two of them put in all their savings, US$17,000 in total. For the next two years they got by on a small bank loan. By early 1993, several employees hadn't been paid in a year, and the two founders hadn't paid themselves in three and a half years, getting through the winters on odd jobs. They could see the juice taking off; they just had no money.

Then came Mike Egan. Founder of Alamo Rent-a-Car, holding 93% of Alamo's stock. The two Toms had met him in their early days servicing his boat in the harbor. Egan put in US$600,000 for 50% of the company. They worried about handing control to an outsider, but they had no other choice. In Egan's own words:

"I made this investment because it makes me wake up in the morning feeling like I'm twenty-five again, starting a company from scratch."

Egan served as an adviser and stayed out of day-to-day operations. The money changed their distribution and inventory: they found better independent bottlers; rented their own warehouse, bought used trucks, went out and sold themselves, delivered themselves, stocked the shelves themselves — and while they were at it, moved their bottles in front of the Snapple. To speed things up, they took on exclusive distribution rights for Arizona Iced Tea in Massachusetts; within three months the distribution team grew from 7 to 100 people, and monthly volume went from 2,000 cases to 30,000. By the end of 1994 revenue had passed US$8 million.

But distribution is a business that needs a "big brand" to spread its costs. After losing US$2 million in 1994, in 1995 they sold the distribution business and focused on "selling juice": their own sales force plus outside distributors, with salespeople going door to door to small stores, making sure the product sat at "eye-to-thigh" height, and checking along the way whether distributors were slacking. Tom Scott said they didn't want to build a house of cards; they wanted solid long-term growth.

On product, they didn't count margins. Pure cane sugar, not high-fructose corn syrup; four times the juice content of the big brands; a proprietary 17.5-ounce bottle against the market's standard 16 ounces. In three years they went from 3 flavors to 27. Under each cap was a printed saying, and their radio ads told stories like the time employee Ned crashed the truck on his first delivery to Boston and destroyed all the juice, or how Larry dropped the first payment into the harbor. Customers loved the story.

The report card looked great, and it was thin. Revenue went from US$233,000 in 1991 to US$29.49 million in 1996, up 92% year over year last year. They turned their first profit in 1995; in 1996 EBITDA was US$969,000 and net income US$369,000. But gross margin was only 30.5%, among the lowest in the whole category: four times the juice, pure cane sugar, plus no futures contracts — growth was too fast to forecast, so they couldn't sign forward purchases. In 1995 the cranberry crop failed, Ocean Spray locked up the supply, and they didn't get a single cranberry.

The weather was changing, too. New Age beverages were the hot spot in 1992–95: ready-to-drink tea grew 24% a year on average, water 34%, juice 32%. But in Exhibit 4, alternative juice drinks, growing about 38% a year in 1991–95, were projected to grow only about 9% a year in 1995–2000. More than a hundred companies crowded in; Coca-Cola, Pepsi and Seagram all wanted to be "total beverage companies," and one of the big players' competitive tactics was squeezing small brands off the shelf. Supermarkets sold 55% of the category's volume but accounted for only 1% of Nantucket Nectars' sales; 93% of their business was in "other" small outlets outside convenience stores. The Midwest and the West were only 9% each.

Then there was Snapple. In November 1994, Quaker Oats bought Snapple for US$1.7 billion; in 1997 it sold it to Triarc for US$300 million, and the CEO was fired. US$1.4 billion evaporated in three years. The industry put it down to two things: Quaker replaced the Howard Stern and "Snapple Lady" ads with corporate-sounding slogans; and, far worse, it tried to take the most profitable distribution business away from the old distributors and hand it to its own Gatorade channel. The distributors put Snapple in the deep freeze, and sales fell off a cliff. From then on the industry had a new word — Snappleization: when a brand is acquired by a big company, the distribution network that helped it win its market is the first thing thrown away.

So these were the questions in front of the two Toms:

1. Sell or not? The company was in better shape than they had ever imagined. Exhibit 7 says that going it alone, it was worth US$34–58 million; inside a strategic buyer, US$106–176 million.
2. If they sold a majority stake, who would they be afterwards? Both wanted to keep running it. Take cash, or take the acquirer's stock to share in the upside? They didn't want to hold another company's stock.
3. Sell to whom? Ocean Spray had a similar culture, was private, had good cash flow, and would lose Pepsi's distribution in May 1998 — about US$200 million of single-serve sales at risk, on a base of US$1.05 billion. Pepsi had the deepest pockets but a history of "downgrading" products to buy volume. Triarc was the best platform for growing the business over the next two years, but it already had Snapple and Mistic, and distributors would get cut.
4. What about the 100 employees — 57 in sales, 20 in marketing, 15 in finance? Would that culture of "no suits, anyone can walk in and find the two Toms" survive?
5. Tom First asked the hardest question of all: "The hard part is figuring out what Nantucket Nectars is worth to someone else, not just to us."

My Thinking

A company doesn't have one price, only a price to someone

Exhibit 7 is the whole case. Same company, two tables.

Going it alone: 20–25% growth in 1999–2002, gross margin flat at 34.3%, a 14% discount rate, exit at 10x EBITDA — enterprise value of about US$47 million. Inside a strategic buyer: growth becomes 25–30% (supermarkets open up), gross margin rises to 37.3% (purchasing scale cuts costs by 10–20%), operating margin reaches 13%, same discount rate and multiple — about US$144 million.

A difference of US$97 million. Three times.

That US$97 million isn't a difference in valuation methods; it is the buyer's problem converted into money. Ocean Spray needs to fill a US$200 million hole, and to it Nantucket Nectars' 57 salespeople and that small-store network are worth one number; to Pepsi, it's an entry ticket into juice, worth another; to Triarc, part of the value would be cannibalized by its own Snapple — yet another number. Value isn't a property of the company; it's a function of who needs it on the day the deal is signed.

Snapple demonstrated this most brutally: almost the same brand, US$1.7 billion in 1994, US$300 million in 1997. No financial crisis happened in between. What happened was that the buyer changed, and the buyer's problem changed.

My own read is that the two sides of the negotiating table are looking at two different tables. The buyer's offer will always be anchored to the one on the left — "on your own, this is all you're worth; I'll give you a bit more." The seller's entire job is to get the table on the right into the room. And the way to do that isn't to argue; it's to have another buyer sitting outside the door.

The window is opened by others, so move in the year they need you

In 1993 the two Toms needed money and sold half the company for US$600,000. In 1997 Ocean Spray needed them, and half the company might be worth US$50 million. Four years apart, same company; the only difference was which side was more desperate.

This time, the window didn't cost them a cent. A story that got it wrong, plus Pepsi breaking up with Ocean Spray in May 1998. Neither was something they could have manufactured, and neither would last forever. Once Ocean Spray patched its own distribution, once Pepsi bought someone else, once Coca-Cola got onto the shelf too, these five companies would drift away from the door.

And on their own side, time was not on their side. Category growth was dropping from 38% to 9%; the 30.5% gross margin was the price of pure cane sugar and four times the juice, and without scale it couldn't be changed; supermarkets wanted multi-packs, shelf power and slotting fees, and 57 people couldn't buy that ticket; one bad cranberry harvest and the supply belonged to someone else. The standalone model assumed 20–25% growth; in a 9% category, that means taking share — from Coca-Cola and Pepsi.

The best time to sell is when the other side's need is at its peak, not when your readiness is. Founders rarely sell when they're "ready," because that day never comes; the company is always one channel, one flavor, one more year of results short. But the other side's gap has a deadline.

My own inclination is to treat that window as one of the hardest numbers in the case: May 1998. It will determine the price more than any discount rate in Exhibit 7.

What's really valuable is the few things big companies can't build

The two Toms made their own list of what underpinned the company's value: a better story than any juice company; a cost structure that was stabilizing; access to 18-to-34-year-olds; the last decent single-serve channel in New Age beverages; and the best vehicle for a juice company to get into juice cocktails without risking its own brand.

The list splits into two halves.

One half is what big companies can't build: the story that started on a boat, the sayings under the caps, the employee who dropped the first payment into the harbor, the office with no suits, young people, the affection of small-store owners who watched the two founders stock the shelves themselves. Ocean Spray has 5 bottling plants and can't build that; Pepsi has shelves nationwide and can't build it either.

The other half is what big companies can fix: gross margin, purchasing, bottling costs, supermarket shelves. Ocean Spray is the world's largest buyer of non-orange juice; in its hands the cranberry problem doesn't exist; 10–20% saved on COGS is exactly where those three points of gross margin in Exhibit 7 come from.

That determines how to negotiate. It's easy for the two Toms to apologize for the second half — "yes, our margins are low," "yes, we're not in supermarkets." They shouldn't. The margin gap isn't a weakness; it's synergy — a reason for the buyer to pay, not a reason to push the price down. What really needs protecting is the first half, because it vanishes the moment it's integrated.

After selling a majority, whether you're a shareholder or an employee is decided by the contract

The professor's second question reads most like a question about life: if they sell a majority but not all of it, what are the two Toms' roles afterwards?

On paper, they'd still be "running the company." In reality, the big decisions would move up: capital, distribution, pricing, recipes, the hiring budget, where this brand ranks in someone else's portfolio. Their daily job would become protecting the story and those 57 people inside someone else's organization. They would be minority shareholders and employees at the same time. Whether that's a good position depends on three things, and all three are written in the contract, not in a handshake.

First, why the buyer is buying. If it wants the story and the young people, the founders are an asset; if it wants to fill a gap and cut duplication, the founders are a transition cost. The first thing Quaker did after buying Snapple was change the ads; the second was change the distributors.

Second, whether the retained stake has an exit. A minority stake is only an asset if it comes with a formula-priced put/call — say, at a fixed EBITDA multiple in years three to five. Otherwise it's just a piece of paper you can't sell, and what you're holding is still a company you no longer control. The two Toms said they didn't want someone else's stock; translated, that means: take most of it in cash, keep a slice for a second bite of the apple, but write the exit first.

Third, autonomy has to be spelled out. Control over the brand and recipes — no switching to corn syrup; keeping the Nantucket office and the no-suits rule; no involuntary changes of distributors for 24 to 36 months; a committed growth budget; a retention pool for the 100 employees, especially the 57 in sales.

They had in fact already lived with a 50% outside shareholder for four years, and it worked because Egan stayed out of it. The first time, you rely on character; the second time, you rely on the charter. The ideal form of a majority sale is "Egan 2.0 plus a distribution network"; the worst form is Quaker.

My own read is that the real answer to this question isn't in the contract; it's in whether the two Toms are willing to say the honest thing out loud: they will be very rich, and they will no longer be the boss. Once that's said, the put is a choice, not a trap.

Five buyers aren't luck; they have to be lined up

What they were doing now was improvising. Seeing two companies separately on the same afternoon, holding meetings out of sight of employees, Ocean Spray not knowing Pepsi existed. In the short run that makes a great story; over three months it's a leak waiting to happen — if employees, distributors or retailers caught wind of it, Snappleization would happen before the deal was even signed.

What they should do is replace improvisation with choreography: a short information memorandum, a data room, NDAs signed first; a timeline — four weeks for indicative bids, three or four buyers into management presentations, final bids accompanied by a markup of the draft contract; make buyers bid on structure, not just price: cash or stock, how much they're buying, the founders' roles, employee retention, commitments to distributors. Set the clock to May 1998.

Do they need an investment bank? Yes. Not because the two Toms aren't smart, but because a US$100 million deal with four or five buyers is a process, and they are running a company growing 90% a year at the same time. A bank also lets them stay the "good guys" — staying friends with their future bosses and leaving the hard talk about price to someone else. A success fee of one or two points on a US$100 million deal is one or two million; if competition pushes the price up by just a tenth, that's ten million. But buyers are buying the two Toms' story, so they should handle the relationship conversation themselves and hand off the price conversation.

There's one more thing to finish before seeing anyone: get aligned with Egan. A partner holding 50% who may want to cash out, and two founders who want to stay and keep building, are two different kinds of seller. Shareholders falling out of step at the last minute will kill a deal.

My choice: sell a majority to Ocean Spray, keeping a slice of equity and a ticket out

If I were asked to pick a side in class, I would choose: sell now, sell a majority, sell to Ocean Spray, through a short, competitive process, keeping a slice of equity and a put written into the contract.

All three reasons for Ocean Spray are structural. It is the most desperate — a US$200 million hole and a May deadline are the best thing a seller can run into. It complements Nantucket Nectars rather than overlapping — it's strong in supermarkets and the Northeast, while Nantucket Nectars is 93% small stores and only 1% supermarkets; less overlap means fewer distributors fired and fewer people laid off. It's private with a similar culture — the two Toms really might be able to stay. Triarc is the best growth platform with the worst integration risk; Pepsi has the deepest pockets and the worst cultural fit. Let those two supply the pressure, and let Ocean Spray win on fit.

Price target: over US$100 million for 100% of the equity — that is, capturing more than half of that US$97 million in synergies. Structure: Egan's 50% and most of the founders' stake for cash, the two Toms rolling over 20–25% between them, a put/call in years three to five, no public-company stock.

I accept the cost. They give up the small chance of "two guys building a US$200 million brand on their own and keeping all of it," and accept a slower, more corporate second half. Some of the culture will be lost; the contract can only slow that down.

Why not stay independent? Because independence means taking a 30% gross margin into a slowing category to fight Coca-Cola and Pepsi for supermarket shelves, and the growth capital they'd raise would dilute them anyway. Snapple already showed what big players do to the category leader. Why not sell everything and walk away? Because that leaves the second bite of the apple and the fate of 100 people on the table — unless the winner is Pepsi, in which case sell it all and leave with the story intact.

Takeaways for Arcus42

Reading this case, what came to mind wasn't juice; it was a moment we see in families all the time: a business that has been running for twenty or thirty years, and someone comes knocking.

First, before answering "what is it worth," answer "to whom." The same business is three different numbers to an industry buyer, a financial investor, and a foreign company wanting into the market. When preparing a family for a sale, the first sheet of paper isn't a valuation table; it's a list of "who needs us right now." The synergy lives inside the buyer, not in your own books; a seller who only calculates "what we're worth" leaves that part on the table.

Second, the window is external; the preparation is internal. The buyer's gap has a deadline, while the seller's preparation — the books, the equity structure, key people, contracts — never gets finished without one. So preparation has to happen when no buyer is knocking. Wait until the knock comes to get organized, and you either miss the window or get squeezed on price inside it.

Third, "who am I" after the sale has to be written down before signing. A founder's role after a majority sale isn't decided by feelings; it's decided by the charter and the exit: how much to roll over, when you can get out, at what formula, which things others can't touch. This question is harder than price, and fewer people ask it in advance. What we can do for families is ask it before anyone has made an offer.

Fourth, the relationship network is the first asset to be integrated away in a deal. The word Snappleization is worth remembering. Often the hardest thing to replicate in a business isn't the product; it's the distributors, suppliers and longtime customers built up over twenty years — and they are exactly what the acquirer "optimizes" first. Protection periods, retention pools, rules on replacement — all of it has to be written into the deal documents, not left to trust.

Fifth, don't be both the seller and the negotiator. The two Toms should tell the story themselves, but they shouldn't negotiate the price themselves. Families are the same: the head of the family is the story itself and shouldn't stand on the opposite side of the price. Professionals manage the process, manage the competition, and say the unpleasant things; the family side needs someone at the table to help them read the contract's structure, align the shareholders, and, before the money lands, map out where the money will go.

Final Words

Before class, the line I agree with most is: "A company doesn't have one price, only a price to someone."

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These are pre-class reading notes, compiled from Harvard case classroom materials, and do not constitute investment advice on any company or transaction.