NEW YORK (The Deal) -- Friends shouldn't do business together, and for two Brooklyn guys who went from selling beer in their neighborhood 45 years ago to building a national beverage brand, AriZona Iced Tea, that adage couldn't ring more true. Tens of millions of dollars in legal fees later, John M. Ferolito and Domenick "Don" Vultaggio may have finally come to terms with not just parting ways as friends, but as partners in what a New York county judge has ruled to be a $2 billion private corporation. There's no substitute for a trading floor to get great ideas, so Jim Cramer created a better one at Real Money, where he blogs three times each day and interacts with 20+ traders. Read him today. An April 21 hearing scheduled to determine the precise terms of Vultaggio's buyout of the 50% ownership interest held by the Ferolito family was called off as the two sides continued to engage in pre-trial mediation expected to result in a settlement. If it happens, Ferolito will be able to return to a lifestyle built around golf and different business opportunities, while Vultaggio finally has the go-ahead to run the beverage company entirely as he wishes, with the opportunity to cash in if and when he chooses to auction it off in a sale. In that case, Ferolito would also be granted a significant consideration if done so within a certain time frame, according to people familiar with the matter. But now Vultaggio and AriZona Beverage Co., a unit of Beverage Marketing USA Inc., have to figure out a way to pay Ferolito. And as bitter as the dispute has been, the aftermath could be difficult in its own way. The same stubborn qualities that drove the two partners apart -- and, to be fair, enabled them to build a huge, phenomenally successful drinks company -- may stand stand in the way of what should be a relatively straightforward financing process. After all, AriZona's success attracted no shortage of admirers and potential suitors over the years. "This should be easily solvable," said one investment banker, who requested anonymity. "There's someone who wants to sell, someone who wants to buy, and a price that's set. Now you're just down to financing. You have to put the past behind you." That past began in the early 1970s when Ferolito and Vultaggio, having graduated high school, together began "selling beer out of the back of an old Volkswagen bus," according to AriZona's website. The duo delivered and distributed reduced-price beer and soda throughout Brooklyn. By the mid-1980s, they had decided to branch out beyond their beer distribution business, Hornell Brewing Co., and launch a flavored seltzer water brand, Spence & Wesley, and then, malt liquor brands Midnight Dragon and Crazy Horse. By 1992, Ferolito had come up with the initial business plan for AriZona, according to a person familiar with the matter. The iced tea product was named after the hottest area in the country, and, at first, everything went smoothly, with Vultaggio running the warehouse and Ferolito taking care of paperwork and finances. But when Vultaggio decided to join his partner in the company's corporate offices, it set the stage for disagreements over everything from charging employees for coffee to where to hold holiday parties, the source noted. Court documents indicate that a conflict began brewing as early as 1994, when Ferolito and Vultaggio butted heads over moving Beverage Marketing's headquarters to Woodbury, N.Y., from Brooklyn. But it was the intervention of others, in general, and David K. Menashi, in particular, that really led to a falling out between the co-owners, the source said. Menashi is Beverage Marketing's current CEO. A Beverage Marketing spokeswoman declined to comment. Ferolito and Vultaggio initially retained Menashi in 1989 as a consultant. He was a certified public accountant at Maier, Markey, and Menashi LLP, and he was engaged to provide financial consulting and accounting services for the two men's enterprises at the time, as well as for personal advisory, accounting and financial services for Ferolito, according to court records. Menashi, who remained a partner in the accounting firm until the end of 2007, ultimately took the reins as CEO of Beverage Marketing, the primary AriZona entity, sometime in 2006 or 2007. The company, meanwhile, was growing beyond its signature 99-cent cans of iced tea. Other brands were being added to the portfolio. Today, the AriZona brand includes CocoZona Coconut Water, Arnold Palmer half-tea, half-lemonade drinks, and a host of green tea products, to name just a few. As Menashi became Vultaggio's right-hand man, with a more aggressive business mindset that differed from the way Ferolito and Vultaggio had run the company, he played a major role in driving the two founders apart, the unnamed source said. Vultaggio eventually took over the day-to-day management of Beverage Marketing in the mid-1990s, with the owners agreeing at the time that Ferolito would continue to play a role when it came to major company decisions. But it wasn't long after that the latter wanted out completely. Ferolito, together with his son, John Jr., has been trying to sell their 50% stake in Beverage Marketing since 2005, but an owners' agreement signed in 1998 restricted the transfer or sale of any ownership to anyone but members of the Ferolito or Vultaggio families. In 2008, Ferolito sought to challenge the long-standing agreement by creating a case-for-controversy, striking a deal to sell an undisclosed minority stake to Lynn Tilton's hedge fund, Patriarch Partners LLC. Though he wasn't successful in selling the stake to Tilton in 2009, the attempt marked a major turning point in his relationship with his partner. "Vultaggio considered this to be a declaration of war," an unnamed source said. "That's when everything started to go downhill very rapidly." Shortly after, in October 2010, Ferolito filed a petition for dissolution, leading to a string of claims and counterclaims, and ultimately, a July 2012, decision by the New York State Supreme Court Appellate division that Ferolito couldn't prevent AriZona from buying his shares. But the difference between the two men had revealed itself long before their business partnership hit the rocks. Ferolito had drifted into a lifestyle that involved lots of golfing, boating and, reportedly, gambling. A billionaire who is said to have several luxury homes, cars and a helicopter, Ferolito's new passions also led him into other business ventures, including the Due Process Stable Golf Course in Colts Neck, N.J., whose $350,000 membership fee puts it amongst the country's most expensive private golf courses. Ferolito even named his 71.3-foot Marlow Explorer yacht that he keeps in Hillsboro Beach, Fla., after the Due Process golf course, according to boatinfoworld.com. Ferolito, who bought the golf course out of bankruptcy for $20 million with Peter C. Gerhard in 2002, later was a defendant in a lawsuit in Superior Court of Monmouth County in Freehold, N.J., by club member Nunzio Innucci Jr.Innucci claimed that allowing Due Process founder Robert Brennan, a convicted felon, to return to work at the facility after getting out of prison prevented him from entertaining business clients at the club, among other things. The case reportedly resulted in a settlement in 2013, though terms weren't disclosed. Belying his physical stature -- Vultaggio stands about 6 feet 6 inches tall -- the other partner has kept a lower profile, but he and his wife, Irene, live a comfortable life as well. They own a 30-room mansion on a two-acre private peninsula in the Long Island community of Sands Point, N.Y., curbed.com reported in April 2013. Also an avid golfer, Vultaggio is a member of the Village Club of Sands Point country club as well as private golf facility Sand Points Golf Club in Port Washington, N.Y. "He's a guy who still has high school friends and treats them as if they were in the same league as he's in," said one source who requested anonymity. But the Vultaggios aren't strangers to litigation, either. The husband and wife were reportedly sued for $16.5 million by their former housekeeper, Norma Genovese, for discrimination and overtime without compensation in 2012. To be sure, owning the AriZona brand has paid off for both the Ferolitos and Vultaggios, with both families receiving more than $500 million in distributions since the company's 1992 inception, according to an Oct. 14 court filing. Vultaggio's sons, Wesley and Spencer, serve as creative director and director of social media and brand development at Beverage Marketing, respectively, according to their LinkedIn profiles. While the boys get their towering height from their father, they may get their creativity from their mother; the unnamed source said Irene Vultaggio has had a big hand in AriZona's distinctive packaging and other aspects of its branding. John Ferolito Jr., meanwhile, has the dubious distinction of ranking eighth on the state Department of Taxation and Finance's latest list of delinquent taxpayers. A Nov. 10 court filing revealed that John Jr. owes more than $67 million in taxes on the trust through which he holds his stake in AriZona. While the exact terms of the AriZona settlement remain unknown, part of the consideration is south of $1 billion, and the agreement also includes a component that would require Beverage Marketing to pay the Ferolito family an additional sum should Vultaggio choose to sell the company within a certain timeframe to a third party, according to people familiar with the matter. On Oct. 14, Justice Timothy S. Driscoll of the Nassau County, N.Y., Supreme Court assigned Beverage Marketing a $2 billion valuation, less than the $3.2 billion Ferolito had argued the company was worth but more than the $426 million price that Vultaggio had attached to it. One month later, Driscoll ordered the company to make a $125 million initial payment to the Ferolito parties, $75 million of which was required to be paid within 60 days and the rest within 120 days, leaving Beverage Marketing with a balance of about $875 million to complete its buyout. But because the $2 billion valuation was a back-of-the envelope calculation, the two sides were poised to battle over the exact consideration at the previously scheduled hearing. The Ferolitos believed they should be owed $1.26 billion, or about $1.135 billion taking into account the $125 million upfront consideration, while Vultaggio contested the payment should be valued at $940 million, according to Nicholas A. Gravante Jr. of Armonk, N.Y.-based Boies, Schiller & Flexner LLP, who is representing the Ferolito parties. Those values include the John Ferolito Jr. Grantor Trust -- through which John Ferolito Jr. holds his 24% interest in the company -- which Vultaggio and Beverage Marketing never believed the company was obligated to buy out. "[Beverage Marketing] is saying that because the valuation by the court is so much higher than they expected, that they [believed they] had the option to leave the trust in," Gravante said. "We don't think the judge was ever giving them the option." While it appears that Vultaggio's buyout of the Ferolito family is probably going to come in the form of a multiyear payout, industry sources reckon the co-founder would be better off paying his former partner right away if possible. "If I were advising the Vultaggios, I'd want to pay now and use the debt markets," said the unnamed investment banker. "It's a billion dollars. You're in a market where you can lever businesses up. I'm sure [Vultaggio is] nervous about the interest expense. Maybe he'd get a little off the price if he can pay off [now]." The exact interest rate decided upon, assuming the agreement calls for installment payments, is unknown. The Ferolitos were aiming for as high as 9%, while AriZona believed it should be allowed to pay off the full consideration in pieces, while at the same time accruing no interest, the attorneys representing each side indicated. "He's going to have very secure debt," Louis M. Solomon of Cadwalader Wickersham & Taft LLP, which is representing Beverage Marketing and the Vultaggio parties, said before the settlement was reached. Solomon said at the time that Beverage Marketing was in the midst of discussions regarding the financing it intends to secure. "[Beverage Marketing] has already paid $125 million," he said. "The company really has every incentive to finish the payments. [Beverage Marketing] wants to get Ferolito paid out, but also protect the company." Beverage Marketing's financials "show that the obligation to pay off the father puts the company in an insolvency situation," Solomon said of what Vultaggio owes the elder Ferolito. "Any of this should require terms over a period of time." Current estimates for installment payments stretch anywhere from a six- to 10-year period, or even much longer, Solomon said at the time. Some parallels, and perhaps some lessons, can be drawn between the AriZona case and Demoulas Super Markets Inc., the parent company of the Market Basket supermarket chain in New England. In December, DSM CEO Arthur T. Demoulas completed a buyout of the 50.5% of the company he didn't already control for north of $1.6 billion from a shareholder group led by his first cousin, Arthur S. Demoulas. While both parties fared well in the end, the bad blood between the two dated back decades to previous generations of the Greek family. It was only after the intervention of politicians in Massachusetts and New Hampshire, dozens of lawyers and bankers, employees and vendors, that a deal was struck. After talking to more than 12 banks, the Arthur T.-led group buying out Arthur S. and his sympathizers ended up taking on all the financing risk, a source familiar with the situation said, noting that most banks were hesitant because DSM was bleeding cash. Almost everything imaginable was considered when the Arthur T.-led group of shareholders examined all of their options to finance the buyout, according to that person. In the end, the deal was financed by two loans, a real estate-backed financing worth roughly $1 billion, and an asset-lite loan of about $600 million, which was backed by the rest of DSM's assets except for the real estate and primarily based on cash flow. Unfortunately for Vultaggio, Beverage Marketing didn't have the enormous benefit Market Basket did when it comes to real estate assets. The grocery chain's real estate holdings gave it more degrees of freedom in terms of financing. In addition to the various structures of installment payments that Market Basket considered, there was one especially unique scenario that might prove instructive for Beverage Marketing and Vultaggio. One strategic suitor offered Arthur T. and his family what was essentially a 40-year call option -- meaning the strategic party would own a small piece of the company until Arthur T., or two generations or so down the road, desired an exit, at which point the strategic player would garner full control of the company, the unnamed source said. Hypothetically, AriZona could have taken such a route, though Vultaggio hasn't been shy about his desire to maintain full control of the beverage company, constantly stating he's not a seller. Solomon reiterated by phone that Vultaggio still has no intention of bringing in a partner. But Boies Schiller's Gravante expects it won't be long before Vultaggio and Beverage Marketing does just that. "They would have no problem selling 50% of the company to a strategic buyer," Gravante said before the settlement had been reached, indicating AriZona could fetch as high as $3 billion. "They would have plenty right there to pay off the Ferolitos." Beverage Marketing, if and when it pursues a sale, will surely garner significant takeover interest from both private equity and strategics, according to sources. "The business [AriZona] has grown a lot and right now beverage companies are really highly valued," said Nicolas McCoy, managing director and head of the valuation consulting practice at Silverwood Partners, explaining that growth is worth more than earnings in branded products. Because it's a private company, sales and earnings figures for Beverage Marketing aren't available. But according to an Oct. 14 court filing, the company's Ebitda had grown to $169.4 million in 2010 from $17.9 million in 1992. Major beverage strategics have paid handsomely of late to expand. Coca-Cola Co. , for example, agreed on Aug. 14 to take a 16.7% equity stake in Monster Beverage Corp. in a $2.15 billion deal, after acquiring a 10% stake in Green Mountain Coffee Roasters Inc. for about $1.25 billion earlier in 2014. Meanwhile, Mondelez International Inc. , the Deerfield, Ill.-based food maker from which Kraft Foods Group Inc. was carved, hopes to complete the separation of its coffee business this year, merging it with D.E. Master Blenders 1753 BV in a $5 billion deal. The combined entity, to be called Jacobs Douwe Egberts, is expected to generate more than $7 billion in sales and Ebitda margins in the high teens. Large beverage conglomerates have had their eye on the AriZona brand for years. Since 2005, Coca-Cola, Tata Global Beverages Ltd. and Nestlé NA have expressed an interest in buying all or part of AriZona, with Tata valuing the company as high as $4.5 billion at one point, court documents show. Outside of all the obvious strategics that would be interested, large private equity firms such as Carlyle Group or 3G Capital could also commit and buy all of AriZona, McCoy said. Still, he acknowledged that private equity firms want to operate with friendly management, and even if AriZona gave away a minority stake of 30% or so, it would change the dynamic of the company. McCoy pointed to VMG Partners' sale of its minority stake in snack food maker Kind LLC to founder Daniel Lubetzy, through which it gained a reported 12.7 times its investment. "VMG would have [garnered more] selling to the public market, but it prevented a dispute at a cost to themselves," McCoy said. "It was better off taking the discount, using that to raise their next fund. Look at how long this [AriZona's valuation dispute] has dragged on." What also argues against a sale is that Vultaggio isn't "a flipper," according to one source, who suspects Beverage Marketing's chairman will probably want his two sons to take over the company. "They have a very creative mother and father," the source said. "It's a hard act to follow."
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