Wednesday, January 31, 2018

WhistlePig Visit

An offer to tour a whiskey distillery will always commandeer my attention, especially if it’s a distillery that isn’t normally open to the public. When a friend who works at a local liquor store asked me to accompany him to WhistlePig (which is only about 1.5 hours from where I live) for a private barrel selection back in September, it didn’t take me long to say yes.

Regular readers may have noticed that I don’t spend much time writing about “craft” distillers (I use quotations because it’s a pretty loosely defined term). I’ll be blunt here; there are very few small distillers who make all of their own whiskey and make it well. Woodinville, about which I wrote recently, is one of those exceptions. Most craft distillers either make a sub-standard product or they re-sell whiskey from one of the major producers and do their best to pass the distillate off as their own.

While WhistlePig fell into the latter camp in their early years, they have since moved in a direction of greater transparency, and I’ve softened my stance on the company. I was actually pretty excited to go to the farm and check out their operation. And just for the record, I have no problem with producers who bottle sourced whiskey, as long as they are open and up-front about what they are doing rather than going down the path of deception.

In 2007 WhistlePig’s founder, Raj Bhakta, at the urging a college friend, bought a defunct dairy farm in the rolling hills of Vermont’s Champlain Valley, in the western-central part of the state. The question of “what’s next?” (and of what to do with the farm) was answered the next year after a chance meeting with Dave Pickerell, the former Maker’s Mark Master Distiller. Pickerell knew of an untapped supply of rye whiskey at a distillery in Alberta, Canada, which Canadian producers would only use in small percentages in their blends. Most potential business partners in the US thought that the whiskey’s country of origin would be problematic from a marketing perspective.

Pickerell and Bhakta struck a deal and began importing this whiskey in 2008, transferring it into used bourbon barrels, and further aging it in an old barn on the farm. Two years later, in 2010, WhistlePig Straight Rye was launched.

What’s interesting about this whiskey is that it was made from 100% rye grain and aged in new charred oak. Unlike bourbon, rye whiskey (by the US definition) does not have to be produced in the United States. This whiskey checked all of the boxes required for the Straight Rye designation; whoever imported it to the US and bottled it could choose to label it as either Straight Rye Whiskey or Canadian Whisky.

Bhakta and Pickerell went with the Straight Rye option, knowing that it would be easier to market and sell the product as such. Unfortunately, they chose to be very secretive about the origin of the whiskey in the early days, and the labels on the bottles did not indicate that the whiskey was imported from Canada, as was required. After a good bit of scrutiny and criticism, the company came around and started to be more transparent regarding the source of the whiskey, as well as coming into compliance with the labeling regulations.

The original setup at the farm consisted of some aging on site (the bourbon barrel finishing part) and a bottling operation. Their goal was to set up a functional distillery there and make whiskey from rye grown on the farm. What neither of these men likely realized is that Vermont ranks pretty damn low on the scale of business friendly states. Between some unfriendly neighboring land owners that tried to impede the business any way they could and onerous state environmental regulations, it took them until 2015 to actually get the distillery part up and running. In spite of these challenges, annual growth has been in the 70% to 80% range, and the company now employs 50 people.

A lot of distillers who start with sourced whiskey claim that they will eventually transition over to making everything themselves. But the reality is that it’s nearly impossible to grow a brand rapidly and buy ever-increasing amounts of sourced whiskey while maintaining the level of production that would be necessary to phase out the sourced stuff once their own distillate comes of age.

In articles written in mid-2016, Bhakta claimed that he was still clinging to his original goal of producing WhistlePig entirely on his farm, using rye grain grown there. Around the same time the operations manager of the distillery gave an interview where he stated their flagship product will always be sourced for fear of changing the established flavor profile, while what they distill in-house will be used for expansions to their product line in the future.

After arriving at the distillery, we were joined by representatives of a few other liquor outlets who were picking barrels for their stores and had a combination of a tasting and an informal tour. There are four buildings (in addition to the house on the property) used for operations. We first passed through a long, narrow building (I think this is where they used to milk the cows) which houses all of their offices as well as operations such as barrel dumping and mingling, filtering, bottling, and shipping and receiving. Adjacent to that is a former barn that is used for barrel warehousing. This is where eight barrels were set out for us to taste through. After sampling the selections that ranged from roughly 110 to 120 proof, we moved on and made our way past a recently completed building called Church Mill (well, work on it wasn’t quite done when I was there, so we couldn’t go inside), which is used for grain intake and milling. The last building we entered is another old barn that has been transformed for its current use. Roughly 1/2 of the footprint is split into two floors which are used for entertaining guests. The first floor features displays with information about the various bottlings and details of the company history. The second floor is more of a “great room”, with a large fireplace at one end and minimal furnishings, and will eventually be used to host tastings. Both floors are “works in progress” which will evolve with time. The back 1/2 of the building is an open two-story space which houses the distilling operations. The centerpiece is a 750 gallon copper combo still (a pot on the bottom with a rectifying column on top). The setup seemed quite modern in design, with a cluster a square stainless steel fermenting tanks along one wall, something I haven’t seen before in the many distilleries I’ve toured.

Fast forward four months, and my friend was ready to pick another barrel. Always up for a free tasting on a Monday afternoon, I joined him for the short road trip along with another whiskey comrade. Shortly after arriving we were greeted by Larry, the Steward of the Brand for WhistlePig’s home territory. He almost immediately blurted out that Raj was no longer with the company. We were all a bit surprised by this and collectively asked a few questions:
When did this happen? – Back in November.
What is he doing? – Probably searching for his next big project.
Does he still have an ownership stake in the company? – Yes.
At that point it didn’t seem appropriate to pry much more, so we went on with the business of tasting and barrel picking (the group of four barrels we were choosing from had a 120+ proofer that was quite tasty, and ultimately selected). I’m usually pretty well-informed of what is going on in the whiskey industry and found it hard to believe I hadn’t heard a whisper of this news, especially considering that Raj had been out of the picture for about two months.

When I got back home I fired up the Google machine for more info, and there was nothing on the topic. But I did find some interesting articles that helped to paint a picture of what is going on. Let’s step back a bit in time to put everything into context.

Even when sourcing product from an outside distiller, rapidly growing a whiskey brand is quite a capital intensive venture. Setting up a distillery and then operating it while the new whiskey comes of age also takes deep pockets. Raj Bhakta was trying to do both at the same time with WhistlePig and bringing in outside investors was the only way to make it happen.

In 2011 Bhakta hired Wilco Faessen, a Dutch investment banker, to help raise capital. Faessen also became an investor himself, taking a 15% stake in the company. Faessen also brought in the Santo Domingo family of Columbia, who took a 12% stake in WhistlePig. Faessen and Christopher Evison, another investment banker who manages some of the assets of the Santo Domingo family, become two members of the six member Board of Managers.

Things got weird in the spring of 2016 when the board called a special meeting and presented Bhakta with allegations of misconduct in an attempt to remove him from the board and as CEO of the company he had founded. He was exempted from the vote because of the allegations against him, which left a small enough board that Faessen and Evison could vote him out on their own

Including his own seat, Bhakta controlled half of the votes on the board, so removing him would allow the unbalanced board to vote to sell the company. According to his telling of the story, Bhakta was given the option of accepting this decision and taking the money from the sale (likely $50 million for his 50% stake in the company) along with a symbolic role in the company, or trying to fight them in court, where he would be financially ruined and have his reputation destroyed.

He chose the latter and filed suit in a Delaware business court a month later (WhistlePig is registered as a corporation in Delaware). The court issued a “status quo” order, allowing Bhakta to continue in his role as CEO until the matter was settled.

In November of 2016 WhistlePig announced that a settlement had been reached and a new governance structure put in place. Bhakta stepped down as CEO and was replaced by Roland van Bommel, an early investor in the company. Peter Rhea, another early investor was appointed to the Board of Managers. The board, now consisting of four members, would also include Bhakta, Faessen and Evison. Bhakta’s new role also included the title of Founder and the position of Chief Steward of the Brand. Additionally, the settlement dealt with the issue of the sale of the farm to the company; the property had been owned by Bhakta and leased to WhistlePig, so investor money used to make improvements to the grounds and buildings had previously been a point of contention.

So, how did we go from a settlement of this battle to the company’s controversial founder being ousted a year later? My online searches came up with a few more articles from the summer of 2017 that didn’t garner much attention at the time. On June 22, a Bloomberg news story, quoting “unnamed sources”, claimed that the company was exploring a sale and taking formal bids after being approached by multiple potential buyers. A day later that story was confirmed by Dave Pickerell, WhistlePig’s consultant and Master Distiller, in a phone interview with WhiskyCast.

Raj Bhakta is a pretty polarizing figure; his ability to spin an enchanting tale about his company and its origins is only matched by his ability to rub people the wrong way. In my opinion, if he’s out then a sale of WhistlePig is imminent. I suspect that the details of the deal are being finalized and that we’ll hear an official announcement soon.

I can’t help but wonder if this was the plan Evison and Faessen had from the time of last year’s settlement and they simply outsmarted Bhakta, or if he just finally gave up the fight and decided to take the money and run. Also of interesting note, van Bommel, the current CEO of WhistlePig, previously served as the CEO of William Grant & Sons and held a seat on the Executive Board of Remy Cointreau. Both companies are among the group of big industry players with the potential to buy WhistlePig. I’m curious to see how the rest of this tale plays out.

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