Uncorking the Wine.com funding saga

Wine.com closed a recapitalization round with only half of the money it said it could raise. The company reported it had received $12 million from Baker Capital in June and that it could raise an additional $5.7 million if its existing shareholders participated in their pro-rata share.

But a recent regulatory filing shows the company raised only $9 million from seven investors, including Baker Communications Fund II. Nearly half of the $17.7 million it might have raised.

Investors at Baker were not immediately available for comment.

Baker may be betting its entire reputation on this deal. The firm raised $1.12 billion for its second fund in 2000, but the vehicle experienced just two positive liquidity events through the end of 2005, according to confidential documents obtained by PE Week.

In total, the fund had disbursed more than $800 million and had a total realized/unrealized portfolio value of just $665 million. However, a positive outcome with Wine.com could help revive the investor, and silence critics who believe Baker is prone to throwing good money after bad.

The relationship between Baker and Wine.com began in 2004, when Baker provided $20 million in mezzanine funding at a $42 million post-money valuation. The deal made Baker the company’s controlling shareholder, and included provisions for two of seven board seats and the right to approve certain corporate transactions, such as a merger or an acquisition. The funding deal also was viewed as yet another restart for the dot-com, which had never turned a profit despite previously raising $165 million since the mid-1990s (it was previously known as WineShopper.com, which Wine.com bought in 2000; it was then bought by eVinyard.com in 2001).

“We are very pleased to have the capital we need to fund our continued growth and expansion, and look forward to working with our new partners from Baker Capital,” said George Garrick, president and CEO of Wine.com at the time of Baker’s previous funding.

Less than two years later, Garrick sued Baker for breaching fiduciary duty and acting in bad faith.

The dispute centers on a supposed $67.5 million buyout offer of Wine.com from Liberty Media. Garrick and other Wine.com shareholders allege that Baker’s two designated directors voted in favor of the deal during a board meeting, but that Baker then rejected it when it came time for a shareholder vote. The firm then stepped in and provided about $6 million in additional funding at a far lower valuation than what Liberty had been offering.

Garrick and his co-plaintiffs allege that they were cheated out of at least $30 million from the Liberty deal not going through and in December sued Baker for breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and unjust enrichment. Garrick also resigned in protest. Baker responded that the charges are without merit, in large part because it claims the Liberty deal was more a vague expression of interest than a binding offer. —Dan Primack and Alexander Haislip