M&A Watch - Monster gets the Better of Coca-Cola Co in Alliance Deal
The Coca-Cola Co announced its purchase of a stake in Monster Beverage Corp earlier this month
There's no doubt about it, the Coca-Cola Co - Monster Beverage Corp deal is a smart strategic partnership, aligning the two parties in an optimal way in the energy drink category. But, looking at the details, particulary Coca-Cola's cash payment of US$2.15bn, the benefits seem to be heavily on Monster's side.
Okay on strategic alignment side ...
Within this marriage contract, of course it makes sense for Monster to assume Coca-Cola's energy drinks business, and become a 'pure-play' energy company by also off-loading its small non-energy portfolio on to Coca-Cola.
It also makes sense for the parties to enter into a long-term distribution agreement, through which Coca-Cola will become Monster's preferred distributor globally, with defined expansion in North America.
Through these arrangements, both parties can focus on what they can do best in the energy drinks arena - Monster on marketing and NPD; Coca-Cola on global distribution and bottling.
... somewhat worse on valuation side …
By our estimate, the assumed valuation in this deal is in line with the 20x EBITDA that Coca-Cola is reported to have paid for Glaceau back in 2007. Arguably, Monster's sustained growth and margins support that.
Then, there's the headline that the deal is “capital-efficient” for Coca-Cola, which suggests that the $2.15bn for a 16,7% stake, defined as “post issuance”, represents the net value of Coca-Cola's energy brands versus Monster's, in the portfolio swap.
That's on the safe assumption that Coca-Cola's energy portfolio, which includes brands like Burn, is significantly more valuable to Monster than Monster's non-energy portfolio - which makes up under 10% of its total sales - is to Coca-Cola. In fact, such small brands will probably get zero focus in Coca-Cola's massive system.
But wait: That net brand value is extra to the $2.15bn, which in fact represents a net cash payment by Coca-Cola. In that case, the overall valuation of Monster is significantly north of around 20x EBITDA.
Factor in also that the valuation does not include a control premium element; Coca-Cola will only have two seat's on Monster's board.
Overall, it's a high valuation.
... much worse on value-creation side
Monster's management is delighted with the deal, because the company will benefit from Coca-Cola's global distribution clout. That's an understatement – the drinks giant will be doing Monster's work, in growing the value of its full energy portfolio.
Monster's value growth, hence its high valuation, is predicated on international expansion. That's precisely where the company has been having problems - around 80% of its net sales are still in the US. Only a group like Coca-Cola can make a breakthrough internationally; Coke is paying for its own value-creation in this deal.
Also strategically, isn't resigning from marketing and NPD, in any drinks category, a defeat for Coca-Cola? And, isn't the group supposed to be focusing on better-for-you alternative beverage segments, like flavoured water and fruit drinks, rather than health risk-laden energy drinks?
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