Random Ramblings: Wine.com, FaceBook and Univision

Apologies for being tardy, but I just got off the phone with Rob Manning of Baker Capital. The topic? His defense of Baker’s seemingly indefensible decision to pour another $12 million into online retailer Wine.com.

For the uninitiated, Baker’s relationship with Wine.com is far more complex than a stubborn case of dotcom infatuation. The original Wine.com was founded in 1994, and raised nearly $100 million from VC firms like Kleiner Perkins and Alpine Technology Ventures. It puttered along like typical dotcomers, although it was hampered by an unlicensed business model that required it to use outside distributors (i.e. high overhead). Then came a disastrous decision to purchase Wineshopper.com, which at the time was only generating around $500,000 in annual revenue. The company began herroraging money, and in 2001 was bought for about the price of some cork by VC-backed eVinyard.com. The merged company was named Wine.com, and raised a bit more money from firms like Osprey Ventures.

In 2004, Wine.com scored a $20 million mezzanine round led by new investor Baker Capital. The deal was priced with a $43 million post-money valuation, with Baker receiving two of the company’s seven board seats. Baker also had the controlling shareholder right to approve certain corporate transactions, including a merger or sale of the company. From here on in, it gets a bit murky.

Liberty Media offered to buy Wine.com at $4 per share, or around $67.5 million, although the issue of binding/non-binding offer is in dispute. Former Wine.com executives claim that the Baker directors voted in favor of the sale during a board meeting, but then voted against the deal during a shareholder vote. Soon after – with Wine.com in need of cash – Baker stepped in and provided around $6 million in funding at a lower valuation. Baker sees itself as the white knight in this matter (i.e., saved Wine.com when no one else would), whereas the executives saw greed. The company’s former CEO and certain shareholders sued Baker last December for breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and unjust enrichment. Baker believes the charges are “without merit” and the case is still in its infancy.

Ok, back to the present. The new deal is essentially (yet another) recap. Baker again is acting alone, although it says that the $12 million could be boosted by $5.7 million in existing (non-institutional) shareholder exercise their pro rata shares. Baker also has installed a new CEO in Rich Bergsund, a former Bain & Co. partner who most recently served as founder and CEO of online hobby/crafts retailer IdeaForest.

But why keep throwing money into what appears to be a sinkhole? Both Manning and Bergsund tell me that the stars are currently aligning for Wine.com, in terms of macro customer online retail adoption and the withdrawal of most other online wine retailers. They also want to create an Amazon-like service that uses customer metadata to inform you of other wines of interest.

But the reality is that this new Wine.com deal is a case of desperation at Baker Capital. The firm’s $1.12 billion second fund (2000) is well underwater, with only a couple of successful exits to date. As of year-end 2005, it had disbursed $800 million into a portfolio that is now worth just $665 million (realized and unrealized). An LP described it to me thusly: “They are operating under the economic theory of ‘moral hazard.’ As their portfolio gets further under water, the only way the GPs will ever see any carry is if they take increasingly risky bets that might right the ship… This doesn’t appreciate the alternate economic theory of sunk costs.”

Baker’s Manning understood the LP’s point, but phrased it differently: “We’re not afraid of projects. We have a number of partners with very good operational experience… with a belief that we can lead strategically, market well and build businesses. A lot of the investments we’ve done are in cash-flow negative businesses, because we believe we can turn them around.” He cites Canal+ as one example. The LP counters with JP Mobile and any of the fund’s other nine realized deals that lost either all, or a majority of their value.

Either way you dice it, Baker needs Wine.com to succeed if it is ever to raise a third fund. But the negative odds are stacked higher than Two Buck Chuck cases at a Trader Joe’s, and this may end up being more about attempting personal redemption, than it is about achieiving ROI for limited partners. If Baker was particularly concerned about the latter, it would have cut its fund size years ago.  

*** Lots of e-chatter about reports that Facebook.com had just received a $2 billion valuation, But like so much e-chatter, it is false.

The confusion stems from an Adweek report that New York-based ad giant Interpublic Group would acquire a 0.5% stake in Facebook as part of a $10 million deal. Some bloggers assumed that this was a straight-up cash-for-equity arrangement, which long division dictates would value Facebook at $2 billion. The deal, however, involves IPG clients – or perhaps one client – agreeing to spend up to $10 million on Facebook over a certain period of time. The equity play is related, but not directly connected in a way that validates the aforementioned mathematics. Instead, a source close to the situation says that Facebook remains valued at around $550 million, which is where it stood following a $25 million venture capital deal earlier this year. Maybe said source is simply trying to manage expectations, but $550 million sounds far more reasonable than $2 billion.

In semi-related news, could someone explain why MSNBC.com felt that yesterday’s MySpace.com security announcement justified top billing for over two hours? It is a PR stunt with no real safety value, except as it related to stalkers/pedoph*les too dumb to create new profiles with fake ages. Waste of time for MySpace, and a waste of space for MSNBC.com.

*** Don’t look now, but the Univison auction is in trouble. The Spanish-language broadcaster has turned down one offer – Haim Saban, Madison Dearborn, Providence Equity Partners, TPG and Thomas H. Lee Partners – and the second consortium is falling apart. Carlyle was the first to pull out (kind of like SunGard redux), and the NY Times is reporting that both Blackstone Group and KKR have followed suit. It will be very tough for this second group to find deep enough checkbooks to replace that trio, except perhaps for some losers from group number one. Ay de mi.