Glenboden M & A Originations

Hansen Natural - a classic alter -M&A candidate

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Origination Status proprietory origination, May 2010
Asset Hansen Natural Corporation (USA), no.1 domestic energy drinks supplier
Buyer candidates include Coca-Cola
Seller management and shareholders of Hansen
Buyer Rationale market leadership in fast -growing US energy drinks category
Seller Rationale maximising exit value
NBs 90% of Hansen Natural's sales are of high -caffeine and sugar energy drinks
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To understand what's good art, you need examples of bad art. Likewise, to understand what makes a company a good M&A candidate, you need examples of those that aren't. Hansen Natural, the soft drinks company, is a standard bearer of the latter group. It would be very risky for Coca-Cola to buy it.

Transformed by entrepreneurs ...Hansen dates back to a soft drinks company founded by Hubert Hansen in 1935. In 1992, when its sales were about US$ 17 mln p.a., it was acquired for US$ 14,5 mln by two South African businessmen, Rodney Sacks and Hilton Schlosberg, who set about a transformation strategy.

It's only been in the last few years, however, that Hansen hit the jackpot with its flagship Monster Energy drink, which has become the no.1 player in the feverishly -growing US energy drinks market, with around 30% share.

... leader in burgeoning US energy drinks ...Energy drinks account for about 90% of Hansen's sales; their immense profitability is reflected in the company's est. 30% EBITDA margin (see chart), which would be enviable for even tobacco and beer producers.

... 'a licence to print money'The exceptionalism doesn't stop with Hansen's growth rate or profitability. The company has an enormous net cash pile, which it's now using to finance a share repurchase programme from its public shareholders.

On top of that, the company outsources its production, bottling and distribution, and exists essentially as a product development and marketing entity.

Thanks to that model, Hansen has been able to build a business that has over US$ 1 bln is sales, but very few fixed assets; its sales to fixed assets ratio is a staggering x17. That stretches the definition of 'lean'.

Questionable M&A viability ...On the face of it, all the soft drinks majors would want to buy a business as successful as Hansen. But scratching beneath the surface, we believe there are fundamental weaknesses in the business model, that might crystallise if it were to change ownership.

On the corporate level, Hansen positions itself as a supplier of better-for-you soft drinks, that are natural and healthy with no artificial ingredients. That applies to its whole product range, encompassing energy drinks, other CSDs (sodas), juices and teas.

... dubious 'natural claim ...In reality, however, the majority of its sales are of energy drinks that are packed with caffeine and sugar. At the same time its juices, most likely to lay claim to being natural, have water as their main ingredient; in the EU they wouldn't get away with calling that 'juice'.

While Hansen remains a mid -sized, entrepreneurial business, these inconsistencies might remain below the 'radar screen', in terms of corporate reputation. However that might change diametrically, if a group with a high profile, like Coca-Cola, were to become the owners of Hansen.

Coke is already vilified, in many quarters, for its 'unhealthy' products and alleged corporate hypocrisy. That's why its M&A focus has been on enhanced waters and fruit drinks, not CSDs, in recent years. In that context, acquiring Hansen could be a very regressive step for Coke.

... not controlling distribution ...There's also the risk inherent in acquiring a business that outsources its distribution. In 2008, Hansen paid nearly US$ 120 in termination obligations to prior distributors, which wiped 40% off its operating profit in that year.

The group now distributes its products mainly through Coca-Cola and Anheuser-Busch. If Coke were to buy Hansen, and brings its distribution exclusively into its own system, then it may need to pay further termination obligations, and risk creating points of conflict, with other Monster Energy distributors.

Unsustainable financial performance...Coca-Cola's deal in early 2010 to acquire the North American operations of its largest bottler, CCE, has raised speculation that it might make a bid for Hansen.

If there's substance to that, then we believe Coke risks paying a lot of money, for a business whose growth might be spiking now, only to see that acquisition crumble away subsequently.

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THIS LEAD'S VALUATION
Size (€ mln) 3.000
Sector energy drinks
Asset Quality USA no.1 branded
Seller mid-cap plc
Buyer large plc
P/S 3,5
P/Ebitda 12,0
Type value estimate incl. net cash
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