No competition.

Low risk.

And state-controlled prices that guaranteed a gross profit of 36.8 percent of annual sales.

That’s the business climate that the state of Maine created for Maine Beverage Co. in 2004, when the company paid $125 million up front for an exclusive contract to be the state’s liquor wholesaler.

The 10-year deal has yielded a net profit — after taxes, loan payments and other expenses — of $110 million for Maine Beverage on sales of about $865 million. The company employs 10 people in Augusta.

Meanwhile, the state of New Hampshire continues to lure Maine shoppers with liquor prices that are as much as 40 percent lower, which costs Maine $10 million to $20 million a year in lost sales.

The lucrative liquor contract was a product of the times — when state officials were grasping for cash to close a $1.2 billion chasm between revenue and spending. Now, with the contract nearing an end, state officials are gearing up for a critical renegotiation of its terms. They say they’re determined to cut a better deal this time and avoid the missteps of the past.

“We should be paying vastly less than the current contract,” said Gerry Reid, the director of the Bureau of Alcoholic Beverages and Lottery Operations. “There will be no guaranteed profit margin going forward. The business is vastly simpler than expected and the amount the state is getting is vastly lower than what it should be getting.”

This time around, the state is looking for a way to increase the amount of money the state collects from liquor sales, while lowering retail prices by $2 to $7 per bottle to make Maine more competitive with New Hampshire’s state-run liquor stores. The state also wants to pay higher commissions to agency liquor stores, Reid said.

Maine Beverage, owned by Massachusetts-based Martignetti Cos. and New York private equity firm Lindsay Goldberg & Bessemer, has not responded to numerous telephone and email requests for comment.

Since 2004, the state has learned it has given away a big revenue stream in exchange for the upfront payment. Most people involved with the bidding or review of the contracts back then declined to comment on the 2004 transaction. Pieced from news reports and public documents, a picture emerges of a desperate time filled with late-night budget amendments and a privately negotiated compromise among the rival bidders.

In 2003, then-Gov. John Baldacci faced a massive billion-dollar budget deficit and was weighed down by campaign promises not to raise taxes. To help bridge the budget gap, Baldacci decided to sell the state’s wholesale liquor business.

The idea had been pitched in January 2003 by lobbyist and Baldacci fundraiser Severin Beliveau, of the Preti Flaherty Beliveau Pachios & Haley law firm, according to press reports at the time.

Beliveau, who originally floated the idea on behalf of a Wall Street private equity firm interested in the contract, did not return calls seeking comment.

The private equity firm, Lindsay Goldberg & Bessemer, which was created by former Morgan Stanley bankers, had sparked the idea for Baldacci, but the governor’s staff felt the offer was too low.

The firm had offered to buy the business for $125 million in cash, plus a annual royalty payment of 5 percent of liquor sales.

“We need money now, but we don’t need money that badly,” Rebecca Wyke, then commissioner of the Department of Administrative and Financial Services, told the Portland Press Herald at the time.

The idea of selling the liquor business had been raised and rejected before. In 1995, Rothschild Inc. proposed buying the wholesale liquor business for $243.3 million. At the time, the state’s annual profit on liquor was $22 million and projected to be declining. Seagrams also contacted the Angus King administration and expressed an interest in buying the business.

In 2003, however, things were bleak enough for the idea to catch hold.

Three weeks after Beliveau raised the notion of its client buying the business, Baldacci submitted a budget plan that called for privatizing the wholesale liquor business.

“No one could quite understand what a gimmick this was. It was camouflaging a huge borrowing program and calling it a licensing fee,” said then-state Sen. Peter Mills. “Powerless we all were. Staggering was the (budget) shortfall. There was no place to go. Baldacci had run on a platform not to raise taxes. He was stuck.”

Baldacci had suggested selling the liquor business in perpetuity for the $125 million payment. Mills, who then was on the Appropriations Committee, said he made a last-minute objection and ended up rewriting the privatization bill in the final hours to restrict the deal to a 10-year lease rather than an outright sale.

“Very few people shared any sense of shock about selling it in perpetuity,” Mills said. “Nobody shared my sense of outrage.”

Political rhetoric at the time said the $125 million upfront payment and a revenue-sharing system would equal what the state had been making in liquor sales.

In 2003, wholesale liquor profits totaled $26 million, suggesting the state could have gotten $260 million over 10 years if it had kept the business. Instead of the state getting those profits, the Maine Beverage Co. won the contract.

Since 2004, the state had gotten a total of $40 million in revenue sharing from the contract — Maine Beverage splits excess profits with the state — in addition to the $125 million upfront payment. The fair market value of the contract, however, was pegged at $378 million in a 2009 report by Deloitte & Touche.

At the time of the award, Peter Welch, part owner of RSVP Discount Beverage in Portland, told the Portland Press Herald that “economically, it’s a very bad decision” for state government. “It was all about filling a budget hole” rather than long-term state planning.

In the aftermath of the liquor contract, some Republican legislators complained they didn’t have enough information on the contract when it was awarded in 2004.

“They fooled the Legislature,” Joe Bruno, then the House Minority Leader, told the Bangor Daily News in 2004. “They ramrodded that budget through, false assumptions were made, and we didn’t have a proper amount of time to review it.”

The bidding

Bidding for the contract brought out all the heavyweight political animals.

Martignetti Cos. of Norwood, Mass., hired as its consultants Kay Rand, who ran Angus King’s staff when he was governor and now runs his U.S. Senate campaign; and Larry Benoit, who ran Baldacci’s staff when Baldacci was a congressman.

Beliveau, meanwhile, represented Maine Liquors, which included Pine State Trading Co. of Augusta and private equity firm Lindsay Goldberg Bessemer.

Other bidders included MaineCentric of Auburn, which is affiliated with SPC Transport; and Reid Distribution Center, of Bangor. Reid was rejected quickly for failing to meet minimum bidding qualifications, but the other three bidders made it to the final round.

The three proposals varied in terms of revenue-sharing offered to the state and the profits projected by each bidder, as well as other details.

Martignetti pegged its profits, after supplemental state payments, at $341 million over 10 years; Maine Liquors estimated its at more than $358 million; MaineCentric’s estimate was $291 million.

Out of a possible 100 points, Martignetti got the highest score of 95 points, while Maine Liquors received 90.8 points and MaineCentric got 83.7 points. Martignetti and Maine Liquors got identical scores on service, the most important category, of 37 points out of 40.

Points were awarded in areas such as quality of service to be provided, the financial capacity of each bidder, the likelihood that the bidder could make the $125 million upfront payment, the supplemental payments each bidder would make to the state, as well as references submitted by each bidder.

State records show that Martignetti projected those supplemental payments to the state at $44.8 million over 10 years, compared to $25.4 million from Maine Liquors and $23.8 million from MaineCentric.

When the state chose Martignetti Cos in January, 2004, Maine Liquor and MaineCentric quickly appealed.

The losing bidders had complained that Martignetti was allowed to amend or clarify its proposal after submission. Opponents of Martignetti also argued that review committee failed to make specific rules to guide the proposal process.

The state’s chief information officer, Richard Thompson, confirmed in a hearing that the state failed to write rules related to the wholesale liquor contract prior to accepting bids. The Legislature also was not kept in the loop on meetings as was required by the law authorizing the contract, the opponents argued.

The appeals board, which was appointed by the Baldacci administration, rejected all the claims and upheld the Martignetti award. The appeals committee ruled unanimously that the companies failed to show that the state’s award to Martignetti was illegal, unfair or arbitrary.

At the time, Nick Alberding, vice president of Pine State, said the state appeals process was “badly skewed” because panel members were chosen from Gov. John Baldacci’s administration.

Two distillers, M.S. Walker, the maker of Allen’s Coffee Flavored Brandy, and White Rock Distilleries, asked the state to vacate the contract, saying Martignetti could use its monopoly power to promote sales of competing products. The distilleries and a trade organization also intervened in the appeals, claiming the Department of Administrative and Financial Services sped up the bid-review process in order to get a $75 million deposit into state coffers as soon as possible.

In a lawsuit filed in April 2004, Maine Liquors and its partner Pine State Trading said laws were broken during the bidding process. The lawsuit also raised questions about the winning bidder’s financing for the 10-year contract and said the state erred in its scoring process to choose the winner.

Thompson, then-chairman of the bid review committee, said at the time that Martignetti’s 70-year history in the liquor-distribution industry was a boost to its application, as well as an existing Web-based ordering system, in-store support service personnel for state liquor agents, and the most attractive process for delivering and collecting payments,

“Experience in the existing business was important to the panel,” Thompson had said.

Shortly thereafter, in May, a compromise was reached that united some of the former bidding adversaries to create the company that became known as Maine Beverage. Specific financial details of the pact were not disclosed.

Under the deal, Martignetti would handle the administration of the contract, Pine State would handle the warehousing and distribution of the liquor, and Lindsay Goldberg would “provide substantial financial resources and expertise to the partnership,” according to a news release at the time.

Lindsay Goldberg became the owner of two-thirds of the company, while Martignetti holds the minority share. Pine State serves as a contractor and has earned a total of $23 million for liquor warehousing and delivery since 2004, according to financial state financial records.

As part of the compromise to create Maine Beverage, court appeals of the 10-year-contract award were dropped. MaineCentric of Auburn, another bidder, reached a separate agreement with Martignetti, according to state officials, but the terms were not disclosed.

“From the state’s point of view, we will be entering into a contract that represents the perfect partnership,” Baldacci said at the time in a prepared statement.

Baldacci characterized the parties as “a family-owned company with more than 70 years of experience in the liquor business to manage the new partnership; a strong investment firm with substantial resources; and finally a tremendously successful company located right here in Augusta that will provide individually customized service to agency stores.”

Going forward

Under the new budget, lawmakers included a provision to renegotiate the contract by June 2013. Instead of the $125 million upfront payment, legislators this time are seeking $20 million upfront and the right to earn more over the life of the contract.

Of the money collected by the state, 15 percent would be used for clean-water programs, 20 percent for the highway preservation and rehabilitation paving program, 30 percent for the budget stabilization fund and 35 percent for the general fund.

In August, WABI-TV in Bangor, quoting anonymous sources, reported that Gov. Paul LePage hopes to use money from the state’s wholesale liquor contract to help pay down its debt to hospitals. A spokesman for the Maine Hospital Association had confirmed to the Portland Press Herald that his organization has been discussing such a plan.

Maine Beverage aims to bid on the new contract, and Dirigo Spirit, a new company formed by businessman Ford Reiche, also has expressed interest in bidding. Other potential bidders haven’t emerged publicly.

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