A commendable Sunday News lead article “A last call for state stores?, Commonwealth needs cash to plug deficit.” This could be the year despite union, social objections” falls short because it quotes politicians and union representatives, but does not obtain opinions from experts in evaluating such transactions. The Watchdog does not presume specific expertise in the area, but is knowledgeable enough to make certain observations:
1) The bottom line for investors is earnings, not revenue. If they wanted revenue, they would have bought General Motors stock a couple of years ago!
2) ‘Earnings’ (defined as the amount returned to the government and the community) for fiscal year 2009 / 2010 reportedly were $383 million in revenue in state liquor taxes, $105 million in “profits” to the state treasury, $25 million to local municipalities and state bureaus, and $4 million for alcohol education. The $383 million in revenue in state liquor taxes would be earned whether liquor stores were state or publicly owned, and the $25 million to local municipalities would probably be paid out in real estate taxes. So the relevant figures are $105 + 4 million = $109 million in ‘profits.’
3) $109 million is what Lancaster General Hospital earns in a typical year, a figure which is bountiful for a hospital serving Lancaster County but pathetic for a state wide monopoly over alcoholic beverage sales. Many investors would be glad to guarantee the state $109 million in revenue – or perhaps even twice that amount – in return for taking over its stores and monopoly!
4) A purchaser of the liquor store licenses would likely be permitted to take over the state stores’ leases and conceivably the furniture, fixtures and equipment. They have value in themselves of tens of millions of dollars, if not more.
5) The state wants to charge a biennial re-licensing fee which would need to be stipulated before a sale. Otherwise, buyers would not be able to project their cost of operations and potential earnings.
6) Prospective purchasers would factor in the cost of the license renewals in calculating what they would be willing to pay.
7) Let’s assume that a buyer were willing to pay twenty times earnings, or $2.18 billion. (The price would be reduced by an amount based on the future discounted cost of license renewals but that doesn’t change the overall value to the state.)
8) $2.18 billion would have to be discounted by the cost of the sale. If sold to a single consortium, the state would be creating a monopoly that would presumably charge the public much more than a competitive system whereby individuals locations were sold off through a bidding process. The latter type of sale would not be without significant costs, say 3% of the proceeds which is $65.4 million.
The problem with the above is the ridiculously low current earnings of $109 million, apart from the $25 million paid to communities in lieu of real estate taxes. Bring in professional management and free them to treat the current system as they would a for-profit corporation and earnings will likely double within three years. Then the value will be $4.36 billion instead of $2.18 billion.
That will be the time to talk about a sale!
