|6. The Barroom Brawl Over Patrón
While the founder and Bacardi vie for control of the tequila, a charity is caught in the middle
September 17, 2007
In its elegant decanter, Patrón tequila is an icon of the good life. It costs $45 a bottle in stores, much more for the Wall Street sophisticates who sip it by the glass in nightclubs. But there's nothing genteel about the legal melee that has broken out over the billion-dollar brand. Patrón Spirits Co. co-founder John Paul DeJoria is battling rum giant Bacardi Ltd. for control. In the middle of their fight stands an unlikely party: a charity formed to educate the world's poor children.
The ferocity of the battle is a reflection of the rising importance of premium liquor. Americans are drinking more booze, and nearly all the growth has come from the top shelf. Last year, sales of liquor priced under $12 a bottle inched up just 0.3%, according to the Distilled Spirits Council trade group. Sales of brands priced $40 and up jumped 23%. Bacardi wants to add a 50% stake in Patrón to its liquor cabinet, especially if it can enforce a three-year-old contract to buy it at what now seems like a bargain price. But DeJoria, who owns half of the company, is fighting for the other half.
Most people think of DeJoria as the man in black in the ads for Paul Mitchell hair-care products. They have long featured the ponytailed 63-year-old entrepreneur, sometimes along with his 50-year-old wife, Eloise, a former Playboy Playmate. DeJoria believes that Patrón is worth more than his $800 million-a-year hair-care business. "I'm probably worth more than Donald Trump," he says.
The story behind the current legal battle begins, appropriately enough, over margaritas. One night in 1989, DeJoria was having drinks with Martin Crowley, an architect working on his Malibu (Calif.) estate. Unhappy with the tequila they were drinking, DeJoria challenged Crowley to find a good bottle on his next trip south. Crowley located a distillery in a small town in the Mexican state of Jalisco. The duo liked the product so much, they asked the owners if they could sell it in the U.S. under their own label. They picked the name Patrón: "He's the boss, the cool guy," DeJoria says.
Before Patrón came on the scene, tequila in the U.S. was mostly a cheap buzz, gulped by college students on spring break. The low-priced tequilas sold here were a mixture of agave cactus juice and other spirits. Patrón was made entirely from agave, giving it a smoother taste. "They positioned themselves to be the BMW (BMW ) of tequila," says Marc N. Scheinman, a professor of marketing at Pace University.
With DeJoria overseeing John Paul Mitchell Systems, Crowley ran Patrón. In April, 2003, he died at his home in the Caribbean island of Anguilla. Divorced and childless, Crowley left his estate to a trust dedicated to educating the poor children of the world. An agreement the pair signed in 1996 gave each the option to buy the other out. But in 2002 DeJoria and Crowley changed the corporate ownership structure for Patrón and didn't update their 1996 agreement to reflect the modification--an oversight that threw the validity of their deal into doubt.
An appraisal after Crowley's death valued his half of Patrón at $43 million. The trustees for the charity asked an Anguillan court to decide if the 1996 agreement with DeJoria was still valid. As that case was working its way to trial, Bacardi made an unsolicited offer for the business. In September, 2004, the trustees agreed to sell their half to Bacardi for $175 million. The deal was contingent on their winning the case against DeJoria. In the meantime, the brand got hot and Patrón's sales and profits soared.
After the trustees for Crowley's estate won an initial verdict and an appeal that declared the 1996 agreement invalid, DeJoria tried another strategy. At the same time he appealed the lower court rulings, he offered a "settlement" of $755 million for Crowley's half-interest. The trustees gladly accepted the higher price, arguing that they had a fiduciary duty to do so. But Bacardi quickly got an injunction in Anguilla to prevent the sale. "The trustees made a very good deal" in 2004, Bacardi lawyers said in court. "Now they want to...accept an even better offer.
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