Glenboden M & A Originations

Should Coke focus on Monster or on better-for-you drinks ?

Priority Rating priority rating 4
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Origination Status press rumour, April 2012
Asset Monster Beverage Corporation (USA), no.2 domestic energy drinks marketer
Buyer candidates include Coca-Cola
Seller founders and shareholders of Hansen
Buyer Rationale market leadership in US energy drinks category, globalisation potential
Seller Rationale attractive valuation
NBs Coke has denied that it's in discussions to buy Monster Energy 'at this time'
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The story is that Coca-Cola will acquire Monster Beverage, more than half of which it distributes anyway, and turn it from an 80% US brand into a global one. Given the enormous sum that Coke would have to pay, that could be a massive gamble. Isn't their M&A trajectory towards healthier drinks instead ?

Monster valuation ... Assuming growth of sales and EBITDA in 2012 at the company's mid-term CAGR rate (although the actual Q1 2012 rate was higher), we come to an enterprise value estimate of around US$ 7 bln (see valuation).

That's a lot for an NPD and marketing company, which outsources its production and distribution, because there are contractual risks that need to be factored into the valuation model, especially in a change-of-ownership situation.

Also, most of Monster's future growth is forecast to be outside the US. That also presents significant risks related for example to consumer preferences and trends in the retail trade.

... commercial risks overseas ... Monster has yet to really 'take off' as a brand outside the US. Sure, overseas sales grew by nearly 60% in 2011; but they're still only 20% of total revenues, and the growth rate slipped by a third in Q1 2012.

Monster has targeted overseas growth in regions such as the Far East and CEE. It's by no means certain however that their target of 14 -26 year-old males will adopt the brand's message so readily in those geographies, for cultural reasons.

Also, the company's made a big surge into CEE, through Coca-Cola Hellenic, in 2011 -12. Through client assignments we can see however, that the private label segment is outpacing the growth of the branded one in parts of that region, and might come to dominate the category.

... focus on better-for-you strategyBesides which, whatever happened to Coke shaking off its unhealthy CSD image, and focusing on the better-for-you segments of the alternative beverages market, like flavoured water and next-generation fruit drinks ?

The M&A trajectory speaks for itself. Significant acquisitions by Coke since 2007 have been Glaceau in waters, Naked and Innocent in smoothies, and leading juice companies in BRIC countries.

In the above context, acquiring Monster, over 90% of whose sales are of caffeine- and sugar -laden energy drinks, would be something of a regressive step for Coke; especially at an all-consuming US$ 7 bln price ticket.

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THIS LEAD'S VALUATION
Size (€ mln) 5.400
Sector energy drinks
Asset Quality US no.2 branded
Seller mid-cap plc
Buyer large plc
P/S 3,5
P/Ebitda 12,0
Type enterprise value estimate
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