Did Specs thwart Walmart’s bid to sell liquor in Texas?

Texas law prohibits public companies from obtaining permits to sell liquor in retail stores — except for two companies that have exemptions.

John Rydman, Spec’s president and one of the owners of the Houston-based chain, said it obtained the exemption through its purchase by Gabriel Investment Group Inc. on Jan. 1.

The purchase, which was made for estate planning purposes, gives Specs the ability to sell the exemption to a public company in the future, Rydman said.

But it also prevented a public company from acquiring the exemption and invading Spec’s turf in Texas, where it is the largest retailer of distilled spirits with more than 200 stores.

“Of course,” Rydman said when asked if keeping potential competitors out was part of the acquisition. – It had to.

He said he did not know if there were other bidders. But it is well documented that Walmart has wanted to break into the liquor store in Texas.

READ MORE: Gabriel’s Liquor claims the state is blocking the deal with Walmart

“I’ve never been familiar with it,” Rydman said. “I didn’t know who I was up against, other than we were negotiating a purchase.”

A Walmart spokesman said the company had no comment. A representative for Blake-Wilder Companies LLC, a St. Petersburg, Fla., company that had owned a stake in Gabriel Investment Group, did not respond to a request for comment.

Rydman would not say how much it cost to buy Gabriel, but he confirmed it was more than $10 million. He chuckled when asked if the price was over $60 million, then denied that it was.

Since the deal closed, Rydman said he’s been peppered with the same question from industry players: Which state is Spec expanding to next?

“My statement is we’re still a Texas company,” he said. “There is so much good here in Texas and so much growth here in Texas that Texas can keep me very busy.”

Specs tried to buy Gabriel more than 15 years ago, with negotiations spanning four years before ending around 2010, Rydman recalled. He said he had conversations with Principal Johnny Gabriel Sr., who heads the Rey Feo Scholarship Foundation. Gabriel Sr. did not respond to a request for comment.

“Johnny and I had an agreement” that Spec’s would buy Gabriel, Rydman recalled from that period. “We left a meeting in Dallas. I came back to Houston. The next morning he called me. ‘John, I can’t do it.’ He would never tell me exactly why.”

But Gabriel, who is also known as GIG, did not give up trying to find a buyer. For nearly a quarter of a century, it said in court papers in 2020, it marketed its business to other companies.

In recent years, it added, those efforts have zeroed in on Walmart.

“Johnny had always dreamed that he would be able to sell to Walmart,” Rydman said. “That was his dream. He was going to cash out.”

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However, Walmart “expressed concern that the rights and privileges associated with GIG’s … exemption from the public company prohibition would not transfer to Walmart if Walmart purchased the shares,” Gabriel said in a 2020 filing.

Around the time Walmart split its reservations in 2019, Gabriel and four related entities filed for bankruptcy.

The Gabriel family had been in the liquor business for more than seven decades before the bankruptcy filings, building a significant local market share with dozens of stores. Annual revenues topped $100 million in 2012, a court filing showed.

Public ban challenge

Gabriel’s rare situation as a public company operating under a state “package store permit” traces its roots back to 1995.

That year, state lawmakers prohibited public corporations from owning or having an interest in a package store permit as a way to keep liquor stores under family ownership. However, the legislature exempted any public company that already had permits or had permit applications pending as of April.

A public company is defined as a legal entity that trades on a public stock exchange or that has more than 35 people with an ownership stake in the entity. Gabriel Investment Group met the definition of a public company because, although it was privately held, it had more than 35 owners, so it received an exemption. The only other entity with such an exemption is Solley’s Liquor, which operates seven stores in Beaumont and the surrounding area, a spokesman for the Texas Alcoholic Beverage Commission said.

Walmart has long sought to change the law, and it has unsuccessfully challenged the ban on public companies on at least a couple of occasions. In 2015, it sued TABC in federal court in Austin, describing itself in the suit as the largest retailer of wine and beer in Texas.

“Walmart also wishes to sell distilled spirits at its Walmart and Sam’s Club locations in Texas for off-premise consumption,” the lawsuit states. “However, it is prohibited from doing so because Texas law irrationally prohibits any publicly traded company from owning or holding the permit needed to do so, i.e., a ‘package store permit.’

The retailer asked the court for an order declaring the ban on public companies unconstitutional.

Spec’s filed a “friend of the court brief” in the case, arguing its support for the ban.

“States have the legitimate power to protect and incentivize family-owned retailers,” Spec said in a 2017 court filing. “Texas has clearly announced it as one target for alcoholic beverages. Courts have recognized the legitimacy of that exercise of power.”

In 2018, US District Judge Robert Pitman held the ban unconstitutional. TABC appealed, and the 5th US Circuit Court of Appeals reversed Pitman’s ruling in 2019. Walmart asked the US Supreme Court to review the appeals court’s ruling, but the Supreme Court denied the request in 2020. Walmart voluntarily dismissed the case the next year.

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Also in 2021, Walmart filed an amended complaint in state court in Austin asking it to declare the portion of the TABC’s code that denies the retailer a package store permit unconstitutional. But Walmart voluntarily dismissed that case in July.

Another fight

Gabriel Investment Group and its related businesses blamed their 2019 bankruptcies on tougher competition from major wine and spirits retailers. As the bankruptcies played out, it filed its own lawsuit against TABC. The agency had concluded that Gabriel’s “grandfather exemption” would not apply if ownership was transferred to another public company.

That was a problem for Gabriel, who said TABC’s interpretation hindered the company’s ability to “substantially complete the terms of a plan of reorganization.” The sale to another public company could add “significant value” to the bankruptcy estates, it added.

While the trial was ongoing, Gabriel found new owners for the business.

The bankrupt entities were merged into a single entity and then split in two in a court-approved deal in the summer of 2020. San Antonio’s Omega Capital Group bought all of the equity in the entity that owned the operating assets—the roughly 31 package stores that remained open and their associated permits. One of Omega’s principals is married to a member of the Gabriel family.

The second entity – known as Legacy GIG – gained ownership of Gabriel, its exemptions and the assets and permits of one store. In addition, Legacy GIG retained Gabriel’s lawsuit against TABC. The entity issued A shares in equal proportion to Omega, Blake-Wilder and existing Gabriel shareholders. B shares were issued to a trust set up for the debtors’ unsecured creditors.

Depending on the outcome of the lawsuit, the exemption for the public company was deemed to be worth “a substantial amount (over $10,000,000) or very little,” a creditors’ committee said in a 2020 court filing.

At least initially, the trial did not go Gabriel’s way. A bankruptcy judge sided with TABC’s interpretation in October 2020. A federal judge in San Antonio upheld that ruling on appeal the following spring. Gabriel then appealed to the 5th Circuit, which went to the Texas Supreme Court.

Last June, the state Supreme Court delivered the victory the Gabriel owners had sought.

The state “Legislature has not included any limitation on ownership of stock in exempt corporations,” the court said in its opinion.

“If GIG’s unusual corporate structure relative to other permit holders had enabled it to grow to dominate the landscape, the legislature could have responded to concerns about the exempt companies’ diffuse ownership or their market dominance. The opposite appears to have happened,” writes the newspaper. added the court.

A few days later, the 5th Circuit reversed the San Antonio federal court’s ruling and remanded the case back to the lower court, which declared in September that the state’s alcoholic beverage code will “continue to exempt Gabriel Investment Group Inc. if it sells any or all of its stock to a non-exempt corporation. “

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The court decisions opened the door for the sale of GIG – including the exemption.

A hint that a buyer for GIG had emerged emerged in a bankruptcy court filing in October by executor John Patrick Lowe, who administers the estate. He revealed that the trust set up for the unsecured creditors had received a distribution of almost $3.9 million.

Lowe was asked not to disclose where the money came from “for a while,” likely because the deal had not officially closed. He now confirms that the money came from a Spec’s family partnership.

The distribution was a pleasant surprise for the creditors.

“It was money out of the blue,” Lowe said. “Nobody expected this to come in. It was a big win for creditors.”

What the Class A shareholders received from the sale has not been disclosed in bankruptcy court filings.

Family affair

Spec’s founders, Carroll and Carolynn Jackson, Rydman’s father and mother-in-law, opened their first store in 1962 in Houston. The store took its name from Carroll Jackson’s nickname, which he got for the glasses he wore.

Rydman met his wife, Lindy, while they were music majors at the University of North Texas. The pair worked for Specs part-time, but Rydman had plans to become a band director.

“It turned out that at the $1.75 an hour my father-in-law was paying me, I was making more than the band director job was going to pay,” he said. “My math was never that bad, so I switched. We asked him if we could join the company.”

Rydmans joined the business in 1971 after graduating from college. Their daughter, Lisa, went to work for Spec’s in 1995.

As part of the acquisition of GIG, Rydman allowed some of Spec’s employees to buy stock in the company, so that it would have more than 35 shareholders to be considered a public corporation under Texas law. The purchases were not through a stock option plan for employees, he stressed.

The acquisition and its exemption give his family a lot of flexibility when it comes to their future plans, he said. That could include selling part or all of their interest in Specs to a public company.

“I’ve grown the company to be quite large,” he said. “And it was hard for us … to leave sometime if the family decides to. So for real estate purposes, it really gives me a cushion — gives my family a cushion — to make the decision down the road if we ever need to.”

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