Shares of Monster Beverage Corporation (MNST) soared more than 30% on Aug 15, reflecting investors’ confidence in its Aug 14 deal with The Coca-Cola Company (KO), which includes the sale of an equity stake and swapping of some brands with the cola giant.
Under the long-term strategic deal, Coca-Cola will acquire approximately 16.7% equity stake in the energy drink maker for $2.15 billion in cash. In addition, Coca Cola will transfer the ownership of its global energy drinks business, which includes brands like Relentless and Burn, to Monster Beverage making the latter Coca-Cola’s exclusive energy play. Coca-Cola will also get to nominate two directors on Monster Beverage's board.
In return, Monster Beverage will transfer its non-energy portfolio, such as Hansen's Natural Sodas and Peace Tea, to Coca-Cola. Finally, Coca-Cola will become the former’s preferred global distribution partner and expand its current distribution relationship with the company in North America to include additional territories.
The transaction, expected to close later this year or early the next, is awaiting regulatory and customary approvals.
We believe it is a win-win deal for both the companies. Gaining a share of the energy market seems a wise decision by Coca-Cola considering that the energy drinks category is doing better than other beverages. In fact, energy drinks was the only category in the broader liquid refreshment beverages (:LRB) sector that saw positive growth last year.
The companies have reportedly been in talks over Monster’s takeover by Coca-Cola. However, analysts commented that taking a stake in Monster was a better decision than a full acquisition as it will allow Coca-Cola to benefit from the energy drinks market without having to handle the controversial category. Energy drinks face significant regulatory headwinds due to concerns about their potential health effects.
This deal — the second major partnership by Coca-Cola this year — clearly shows that the maker of Coke, Diet Coke and Sprite is striving to diversify its portfolio beyond carbonated soft drinks which are likely to remain under pressure due to growing health and wellness consciousness.
In February this year, Coca-Cola bought 10% stake in Keurig Green Mountain, Inc. (GMCR), the maker of Keurig single-serve coffee machines. In May, the company announced that it would increase the stake to 16%. Under the deal, Keurig Green Mountain will exclusively make Coca-Cola branded single-serve pods for use on its upcoming Keurig Cold at-home beverage system that will make cold beverages. The deal opens up an exciting new packaging format for the Coca-Cola brand.
As regards Monster Beverage, the deal will provide it full access to Coca-Cola’s world-class global distribution network. In addition, the company will benefit from the addition of Coca-Cola’s energy brands and become a pure energy company. The deal should also significantly expand Monster’s presence in the international energy drinks market where it currently has a limited presence. Most importantly, Monster Beverage’s cash position should get a major boost from the deal.
Both Coca-Cola and Monster Beverage carry a Zacks Rank #3 (Hold). A better ranked beverage stock is PepsiCo, Inc. (PEP) which carries a Zacks Rank #2 (Buy).