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Another option for ABC privatization: sell stock

Rosalind Helderman

Could Virginia privatize its state-owned liquor system by selling stock in the system to interested investors?

That was a proposal hatched in the late 1990s under then Gov. Jim Gilmore (R)--later presented to a newly-elected Gov. Mark Warner (D).

According to an analysis conducted at the time by J.P. Morgan, Virginia could earn up to $850 million by creating a new corporation to run the Alcohol Beverage Control system and selling stock in the new company. And that analysis was based on ABC's profits in the 1990s, which have since grown considerably. Based on today's dollars, one investment banker who informally consulted on the proposal said he believed the state could get $1.5 to $2 billion for the system.

That kind of cash would eclipse the $500 million Gov. Bob McDonnell (R) has said he hopes to get in upfront money for road improvements by going private.

The plan was originally proposed by Howard Lee, who served as ABC's director of adjudication and chief administrative law judge. Reached Thursday, Lee today declined to comment on the proposal, citing confidentiality agreements he had signed with several Virginia governors on the topic. (Including McDonnell? Lee would not say.)

But Lindsay Trittipoe, the investment banker, said he continues to believe a stock sale is the best way to privatize.

Under the proposal, the state's new ABC corporation would be run by a corporate CEO and a board of directors. Stock would be divided into Class A and Class B shares. State government would control all class A stock, entitling the government to a certain number of appointments to the ABC corporation's board.

Private shareholders who purchased class B stock would hold the remaining seats on the board. The board would make decisions like whether to franchise retail outlets. According to the documents, Lee also suggested creating a new beefed up state enforcement unit to monitor any possible violations of alcohol laws at outlets run by the new ABC corporation.

Selling off the system in one fell swoop to a single investor or group of investors is, indeed, one of four privatization models McDonnell's staff have said they've examined for the future of ABC. The downside, they've said, is that such a model would not result in a newly free market for a variety of private businesses. Instead, it would essentially replace one monopoly with another.

Instead, they have said they are leaning toward a model that would allow retailers to auction for one of 800 to 1,000 store licenses. Wholesalers would also bid for licenses. McDonnell has not unveiled his detailed privatization proposal.

And so Trittipoe encouraged McDonnell to take another look at the stock offering option.

"If we're going to keep a model where the public has to pay huge taxes, I'd at least like the state to realize more than $200 or $300 million," he said. "I just want to make sure this idea is getting vetted."

By Rosalind Helderman  |  August 12, 2010; 5:22 PM ET
Categories:  Robert F. McDonnell , Rosalind Helderman  
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