Analysis - Coca-Cola Co can unleash Monster with energy plunge
Monster Beverage will gain access to the Coca-Cola distribution network
After years of speculation, the Coca-Cola Co yesterday finally took the plunge and agreed to snap up a 16.7% stake in Monster Beverage Corporation.
In return, Monster will get US$2.15bn. But analysts have been quick to point out that that money is not the only incentive for the energy drinks maker. Likewise, Coca-Cola will gain more than just a bigger share of the fast-growing energy drinks market to prop up a declining CSD portfolio.
Jonas Feliciano, Euromonitor International's senior beverage analyst, believes that giving Monster access to Coca-Cola's global distribution network “could have major ramifications internationally”, as it will add velocity to an ongoing overseas expansion for the energy drinks firm.
In recent analyst conference calls, Monster CEO Rodney Sacks has boasted of his firm's international build-up and how new and forthcoming facilities in countries including Japan, South Africa and India are lowering margins and cutting into the market share of the more internationally-minded Red Bull.
Feliciano says that the Coca-Cola partnership will aid this work, and Monster “will have an easier time penetrating key markets”. “This is especially important because of the rapid changes occurring in the energy drink category,” Feliciano adds.
In turn, the analyst says, Coca-Cola will have a direct route to Monster's “highly coveted new product development team”, which has churned out an array of energy drinks extensions including the “high profile” no-calorie Zero Ultra.
Stifel analyst Mark Swartzberg says that by Coca-Cola handing its energy drinks portfolio to Monster it means that the Atlanta-headquartered group is “acknowledging defeat with its own brands’ participation in the energy segment”.
Swartzberg argues that the partnership is Coca-Cola's way of putting its energy brands under the control of a major player in the "proven in its ability to take share from Red Bull in multiple markets”.
As Wells Fargo's Bonnie Herzog summarises, this is a “win-win” for both companies. “Both companies will be able to capitalize on each other's respective strengths,” she says.
Meanwhile, Ian Shackleton at Nomura writes today that the minority stake Coco-Cola has bought is “better than a full deal” as it allows the company to expand Monster's distribution without the risks of total ownership. Highlighting the Vitaminwater takeover in 2007, Shackleton says: “The history of Coca-Cola fully acquiring brands in new categories has not always been successful.”
The transaction is not expected to close until the turn of the year and is still subject to regulatory approval, so there is still time for the deal to change. There's also the issue of a number of lawsuits Monster is facing over alleged health effects of its products - though one involving a 16-year-old boy was this month settled out of court.
But Coca-Cola seems smitten by its potential new partner. In a media call yesterday, Muhtar Kent reportedly confirmed that Coca-Cola will have the right to up its stake in Monster to 25%, a move that would mirror the increased control it took of Keurig Cold co-developer Keurig Green Mountain earlier this year.
And, as with the Keurig investment, the Monster deal has the potential to take Coca-Cola - a company struggling to stabilise its core business - into exciting new growth territory.
The Coca-Cola Co has said smaller pack sizes are driving "a tremendous amount of positive growth" in the US as it looks to drive performance through improving price/mix....
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