One Rock/Metropoulos Pursuing Nestlé Buyout Despite Arrowhead H2O Rights Uncertainty

By Henry Frye and Amanda Frye
Last month, private equity firm One Rock Capital Partners, LLC announced that it was teaming up with Metropoulos & Co. to purchase the Nestlé owned “Arrowhead 100% Mountain Spring Water” brand along with other Nestlé North American water products. The Arrowhead name is derived from the landmark Arrowhead in the San Bernardino Mountains near the former famed Arrowhead Hotel Report. Despite the name association in the branding of the product, the current water withdrawals take place several miles away in the San Bernardino National Forest. The private equity deal is reportedly in the final stages with closing expected sometime this spring.
The Metropoulos family is a darling among both investors and junk food fanatics for saving Twinkies® from near extinction, as the maker Hostess was on its death bed after a long financial decline and looming bankruptcy in 2012. The following year the Metropouloses along with Apollo Capital Management bought Hostess and then turned Hostess profitable and transformed the private holding into a publicly traded company. The Twinkie ® was saved!
Alongside One Rock Capital Partners LLC, the Metropouloses are now trying to repeat that “twinkie magic” with water as they seek to purchase Nestlé Waters of North America, Inc., which includes the Arrowhead brand.
But how does one acquire a company? In financial lingo, the industry of buying and flipping companies is called private equity. Buying a company has many parallels to buying a house. Companies, like houses, are expensive, so most buyers do not purchase with cash; rather they take on debt and eventually build their ownership, or equity, over time as the debt is paid. On Wall Street, debt is called “leverage” and most private equity deals are “leveraged buyouts.” However, this is where homes and companies differ. Companies make money through their day-to-day operations, and the cash that the company is generating can be used to pay off the leverage, increasing the private equity firm’s ownership of the company. Even with minimal management from the private equity investors, money can be made seemingly out of thin air. However, many private equity firms have an “exit strategy” which is akin to flipping a house. In order to make a killing, they often plan to either resell the company to industry rivals or plan to take the company public. Return on investment for such deals can often be over 30 percent, with a twenty-year average of over 10 percent; that certainly beats keeping money in a savings account.
If money coming from thin air sounds too good to be true, it is; great returns come with great risks. Many bought-out companies flop and the investors backing these private equity deals lose their shirts. Of course, no investor wants to risk losing what he or she is putting into the undertaking, as in the Metropouloses’ case, their Playboy mansion, so what are they to do?
Often a limited liability corporation (LLC) is formed, which in the Golden State like a corporation needs to be registered with the California Secretary of State when doing business within the state. A second option would be one of Wall Street’s latest innovations: the blank check company, known as a “special purpose acquisition company,” known by the acronym SPAC. What SPACs do is “crowdsource” their funding on the stock exchanges by issuing shares that everyday investors can buy. If enough money is raised through people buying shares, the sponsors of the special purpose acquisition company first dole additional shares out to themselves as founders shares for a fraction of the cost and then these shares can be converted into class A stock with an instant 1,000 times gain. Next the SPAC founders go shopping to buy a company. They do not have to specify what company they plan to buy ahead time and minimal disclosures are practically encouraged under the 2012 JOBS Act. From then on, the SPAC behaves like any other private equity firm but with one big difference: the public takes on the primary risk if the deal goes sour, not the original private equity investors themselves.
The invention of the special purpose acquisition company did not go unnoticed by the Metropoulos family. The Hostess buyout used a SPAC, Gores Holding Inc., with a roll-over contribution from Metropouloses. It is likely that this playbook will be used to buy Nestle’s water operations. A new SPAC named Gores Metropoulos II (Nasdaq: GMIIU) was registered with the SEC in January 2021, a month before the Nestle deal was announced. The Metropouloses’ publicist, Hannah Arnold, denied that a SPAC will be used in the Nestle water deal.
“This is not a SPAC,” Arnold said.
Even though One Rock Capital Partners, LLC’s website lists a Los Angeles office, the California Secretary of State’s office indicates that company has not filed paperwork, as required by law, to do business in the state. Security and Exchange Commission (SEC) filings for Gores Metropoulos Inc. list an office in Beverly Hills, but there is no filing for that entity listed with the Secretary of State. It would appear that neither One Rock Capital Partners, LLC nor Gores Metropoulos Inc is legally operating in the State of California.
The water deal was reportedly valued at $4.3 billion. The Sentinel contacted One Rock to clarify if this price was the purchase price, market capitalization or equity valuation, but no clarification was made. People familiar with private equity deals say the $4.3 billion is not the price being paid. If investors blindly hand over their money for Metropouloses to go shopping, the investors may not know what they are walking into.
Over the past five years, the Arrowhead water withdrawals in the San Bernardino National Forest have been under a great deal of scrutiny. These withdrawals occur at the Strawberry Creek headwaters around 5,000 feet elevation using a series of mountainside horizontal borehole wells and tunnels that annually drain multi-millions of gallons of forest groundwater through a two-mile pipeline that terminates at a holding area along Old Waterman Canyon Road. The water is then picked-up by large tanker trucks and hauled to a bottling plant. The groundwater withdrawals are reported to the San Bernardino Municipal Valley Water, which at present is taking steps toward initiating litigation against Nestlé Waters of North America over those withdrawals. On March 2, the San Bernardino Municipal Valley Water District Board of Directors met in closed session to discuss pending litigation against Nestlé Waters of North America, Inc. Upon the board reconvening, it was announced that the board gave direction to legal counsel, but no further information is available.
One reason potential investors in the Gores Metropolous II special purpose acquisition company may be well-advised to exercise caution is that there are questions as to whether Nestlé’ has a legitimate claim to and any future guaranteed access to the water that is the centerpiece of the Arrowhead Spring Water Bottling Enterprise.
The state water board has an ongoing investigation into both Nestlé’s Arrowhead operation and water rights as the California Water Board has ultimate determinative authority over water right issues throughout the Golden State, including on federal lands therein.
In 2017, the water board’s initial investigation limited Nestlé’s temporarily authorized water withdrawals in the San Bernardino Mountains to 26 acre-feet a year.
An acre foot equals 325,851.4 gallons or 43,560 cubic feet, the amount of water that would cover one acre, 43,560 square feet, to the depth of one foot.
The 26 acre-feet allotment is about 20 percent of the 192 acre-feet (62.56 million gallons) Nestlé was previously siphoning from Strawberry Canyon annually. Records indicate that Nestlé has not complied with the reduced authorized water orders, and that the company took 144 acre-feet in 2017, 141 acre-feet in 2018 and 210 acre-feet in 2019, with no indication of compliance in 2020 or 2021.
This has left Nestlé’s Arrowhead Spring Water bottling division potentially vulnerable to enforcement action and hefty fines. Moreover, Nestlé’s action is likely to prompt the state water board to make an exhaustive review of the water rights pertaining to the Arrowhead Spring Water operation that grew out of that company’s corporate predecessor’s claims to the water drawn at the 5,000 foot elevation in Strawberry Canyon. The Sentinel’s review of the public record indicates those rights were erroneously conflated with a spring much lower down the mountain at the 2,000 foot elevation proximate to the historic Arrowhead Springs Hotel. It thus would appear that Nestlé does not, in fact, have a valid claim to the water it is attempting to market to the Metropolous Family.
In a recent correspondence obtained by the Sentinel, state water board officials indicated that the new owners would need to comply with California laws and regulations and be the respondent to the water rights being investigated.
The US Forest Service permit for the Arrowhead pipeline expires in August 2021. According to the permit terms, the permit is non-transferable; the new owner would need to reapply for the permit with conditions attached. If the water rights case rules against Nestlé and a determination that environmental damage has been done to Strawberry Canyon and/or forest property dependent upon the aquifer Strawberry Creek supplies, specific liability on Nestlé’s part could follow, including accountability for making false claims to the federal government to obtain a permit. This legal trouble is only a fraction of the liabilities mounting for Nestlé Waters North American water bottling operations in the U.S. and Canada.
Nestlé boasts on the One Rock website that it “conserves 18,000 acres of natural watershed area,” but Nestlé does not own the San Bernardino National Forest, nor does it have, at present, any established water rights in the San Bernardino Mountains. Drafting billions of gallons of spring water or groundwater out of drought-stricken California clashes with the state government’s intended goal of conservation. Much of Nestlé’s water appears to be the product of water contracts like the contract in Deer Canyon with Cucamonga Water District. Others are of questionable spring or groundwater withdrawals including ones in Running Springs and Southern Pacific Springs at the edge of the San Bernardino National Forest.
Across the country there is a great deal of litigation over Nestlé’s water takes including a class action lawsuit involving Poland Springs in Maine. Other permits are not transferable or under litigation. There is curiosity in some circles as to why the Metropoulos Family is pursuing Nestlé’s troubled waters, beset with so much pending liability and litigation across North America, including circumstances like those in the San Bernardino Mountains, where the potential exists that at some point, perhaps sooner rather than later, it will be determined that the owner of the Arrowhead brand has no rights to the water it claims it owns. Unknown is whether the Metropoulous Family knows something the rest of the public does not. Also unknown is whether Nestlé’s corporate officers know something the Metropoulos Family does not.
Perhaps the private equity deal now being gestated between One Rock Capital Partners, LLC and the Metropoulos partnership and Nestlé represents a Wall Street play to start commoditizing water in an unregulated framework. If so, this marks a turn in the way the world works, one in which stock shares of water are to be bought and sold in the same way shares of Apple or Johnson & Johnson or the Ford Motor company are. This runs counter to the laws of nature and biology. Humans may crave Twinkies from time to time, but they need water to live. Wildlife needs water, not Twinkies. When forests burn, firefighter rely on water, not Twinkies.

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