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Monster’s Surging Sales Build Case for Coca-Cola Deal: Real M&A

January 10, 2014

Monster's Energy Drink

The Monster Beverage Corp. logo is displayed on the window of a refrigerator housing cans of the company's energy drink for sale at a convenience store in Redondo Beach, California. Photographer: Patrick T. Fallon/Bloomberg

Even after getting $3 billion more expensive in two years, Monster Beverage Corp. (MNST:US) could still be a desirable target for beverage companies in need of a sales jolt.

The long-standing subject of takeover speculation is increasing revenue faster than every major U.S. soft drink maker, according to data compiled by Bloomberg. That includes Coca-Cola Co. (KO:US), which is poised to report its first annual sales drop since the financial crisis. Coca-Cola may be motivated to bid for the maker of Monster energy drinks to protect their distribution agreement, said Stifel Financial Corp.

Monster’s growth (MNST:US) would be costly to buy, and any suitor would have to weigh the risk of betting on energy drinks at a time when health concerns about caffeine-rich products have spurred a U.S. regulatory investigation. Still, even at a 41 percent premium, the $16 billion purchase could boost Coca-Cola’s earnings, according to Bank of Montreal.

“It’s going to be an expensive acquisition because of the growth,” Jack Russo, a St. Louis-based analyst at Edward Jones & Co., said in a phone interview. “Certainly any buyer that wants to get into this category has to look at the regulatory environment and see that there are a lot more alarm bells going off about energy drinks. Those two things need to be weighed.”

Still, “a transaction like this would give a buyer a huge, huge base in the energy drink category,” he said.

Deal Talks

Coca-Cola explored an acquisition of Monster in early 2012, according to a person familiar with the matter, who asked not to be identified because the discussions were private. The talks ended without a deal because Coca-Cola decided that Monster’s asking price was too high, the person said.

In April of that year, after the talks had fizzled, the Wall Street Journal reported Coca-Cola explored a purchase. Coca-Cola released a statement later the same day saying “at this time, we are not in discussions to acquire the Monster Beverage Corporation.”

Monster’s market value rose to a peak of $13.9 billion in June 2012 from $8 billion at the start of that year. Yesterday, the company was valued at $11.3 billion.

Petro Kacur, a spokesman for Coca-Cola, said the company doesn’t comment on speculation, when asked whether it’s still interested in acquiring Monster. Tammy Taylor, a spokeswoman for Monster, declined to comment on whether the company has received interest from suitors or is considering a sale.

In each of the last three months, energy drink sales in the U.S. rose 4.8 percent or more from a year earlier, versus declines in carbonated drink sales, data compiled by Bloomberg show.

Sales Growth

Red Bull, owned by Austria’s Red Bull GmbH, and Monster have the largest share of the global energy drink market, according to Thomas Mullarkey, a Chicago-based analyst at Morningstar Inc. While Coca-Cola, the world’s largest beverage company, distributes Monster in the U.S. and owns smaller brands Full Throttle and NOS, it doesn’t have its own major energy drink, Mullarkey said.

Monster’s projected revenue growth of 12 percent this year is almost four times that of Coca-Cola, according to analysts’ estimates (MNST:US) compiled by Bloomberg. Monster’s sales may surge 53 percent through 2017, topping every other U.S. beverage maker (KO:US) valued at more than $50 million, including PepsiCo Inc. (PEP:US) and Dr. Pepper Snapple Group Inc., the data show.

Coca-Cola, which is expected to report earnings next month, may disclose that revenue fell 1.6 percent in 2013, according to analysts’ estimates (KO:US) compiled by Bloomberg. The company’s sales haven’t declined since 2009, data compiled by Bloomberg show.

Takeover Price

“Strategically, and from an attractiveness point of view, it certainly makes sense for Coca-Cola to be buying Monster,” Amit Sharma, a New York-based analyst at Bank of Montreal, said in a phone interview. “They have distribution agreements with them. Coke could take Monster into a number of markets (KO:US). And from Coke’s point of view, they don’t have energy drinks to really go to market with.”

Coca-Cola could pay $90 to $95 a share for Monster and the deal would still boost earnings per share (KO:US), according to Sharma. Monster shares closed at $67.55 yesterday.

Today, shares of Monster rose 3.4 percent to $69.82, the highest closing price since July 2012. It posted the biggest gain among consumer staples companies in the Standard & Poor’s 500 Index.

The U.S. Food and Drug Administration’s investigation into caffeine-rich products after reports of deaths will make buyers hesitant to pull the trigger, Mullarkey of Morningstar said.

Coca-Cola would probably wait until the FDA addresses the health risks and imposes any potential restrictions on marketing products that contain caffeine, Sharma said.

FDA Risk

The risk of “meaningful changes” to ingredients, labeling, and how the products are sold has lessened over the past year, opening the door for acquisitions, according to Stifel’s Mark Swartzberg and Mark Astrachan.

Coca-Cola may not be the only logical buyer. Anheuser-Busch InBev NV (ABI), the maker of Budweiser, also has distribution agreements with Monster and would benefit from acquiring the energy drink company, the Stifel analysts wrote in a Dec. 19 report. Beer accounted for more than 90 percent (BUD:US) of the Leuven, Belgium-based company’s revenue in 2012.

While PepsiCo’s Americas Beverages division has the most to gain initially from acquiring Monster, Chief Executive Officer Indra Nooyi doesn’t seem interested in such a large purchase, the report said.

Pepsi’s Plan

“PepsiCo is an extremely well-architected portfolio geographically and from a product perspective, we are hitting our stride,” Nooyi said on an earnings call last year. “We do not need large-scale M&A to deliver on our financial goals.”

Representatives for PepsiCo and Anheuser-Busch said they don’t comment on speculation, when asked whether they’re considering acquiring Monster.

The threat of losing Monster to one of its rivals could motivate Coca-Cola to bid in order to protect the growth it gets from distributing Monster products, according to the Stifel report.

A deal is less likely now than it was in the past given Monster’s size and rich valuation, said Philip Terpolilli, an Independence, Ohio-based analyst at Longbow Research.

Monster’s market value has more than tripled from about $3.5 billion in 2010. With an enterprise value that’s 19 times (MNST:US) its trailing 12-month earnings before interest, taxes, depreciation and amortization, Monster is also more expensive than any of its peers, the data show.

How Desperate?

“If they haven’t bought it by now, who’s going to be buying it?” Terpolilli said in a phone interview. “This category is becoming more saturated, and every year it becomes harder and harder to grow. That’s coupled with the fact that their international expansion is still a bit of a wild card.”

It comes down to how companies such as Coca-Cola will refuel growth as consumers move away from soda in favor of sports drinks, energy drinks, teas and juices, Russo of Edward Jones said.

“The key is, how desperate do these companies feel to offset that carbonated soft drink decline and how desperate are they to get into other categories?” Russo said. “This one is going to have a high entry price.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

The Monster Beverage Corp. logo is displayed on the window of a refrigerator housing cans of the company's energy drink for sale at a convenience store in Redondo Beach, California. Photographer: Patrick T. Fallon/Bloomberg

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Companies Mentioned

  • MNST
    (Monster Beverage Corp)
    • $112.0 USD
    • -0.56
    • -0.5%
  • KO
    (Coca-Cola Co/The)
    • $43.0 USD
    • 0.06
    • 0.14%
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