Glenboden M & A Originations

Monster gets the better of Coke in strategic alliance deal

Priority Rating priority rating 3
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Origination Status joint announcement of strategic partnership, August 2014
Asset Monster Beverage Corporation (USA), no.2 domestic energy drinks player
Buyer The Coca-Cola Company (USA), leading global soft drinks group
Seller founders and public shareholders of Monster
Buyer Rationale solution to lack of leadership in energy drinks category
Seller Rationale attractive valuation, global distribution access, additional energy drink brands
NBs transaction includes cash payment and net value of brands contribution by Coke
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There's no doubt about it, the Coke - Monster deal is a smart strategic partnership, aligning the two parties in an optimal way in energy drinks. But looking at the details, especially at Coke's cash payment of US$ 2,15 bln, 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 Coke's energy drinks business, and become a 'pure-play' energy company by also off-loading its small non -energy portfolio onto Coke.

Of course it makes sense also for the parties to enter into a long-term distribution agreement, through which Coke 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; Coke on global distribution and bottling.

... somewhat worse on valuation side ...By our estimate, the assumed valuation in this deal is in line with the x20 EBITDA that Coke is reported to have paid for Glaceau back in 2007 (see valuation). Arguably, Monster's sustained growth and margins support that (see profile).

Then there's the headline that the deal is 'capital efficient' for Coke, which to Glenboden suggested that the US$ 2,15 bln for a 16,7% stake, defined as 'post issuance', represents the net value of Coke's brands versus those of Monster, in the portfolio swap.

That's on the safe assumption that Coke's energy portfolio, including brands like 'Burn', is significantly more valuable to Monster than Monster's non -energy portfolio, which makes up under 10% of that company's sales, is to Coke. In fact such small brands will probably get zero focus in Coke's massive system.

But wait - that net brand value is extra to the US$ 2,15 bln, which in fact represents a net cash payment by Coke. In that case, the overall valuation of Monster is significantly north of cca. x20 EBITDA, surely ?

Plus the fact that the valuation does not include a control premium element; Coke will only have two seat's on Monster's Board. Overall, it's a high valuation.

... much worse on value -creation sideMonster's management hails the deal, because the company will benefit from Coke's global distribution clout. That's an understatement - Coke will be doing Monster's work, in growing the value of its 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 - cca 80% of net sales are still in the US. Only a group like Coke 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 Coke ? Also, 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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THIS LEAD'S VALUATION
Size (€ mln) 9.500
Sector energy drinks
Asset Quality US no.2 branded
Seller mid-cap plc
Buyer large plc
P/S 5,6
P/Ebitda 21,2
Type enterprise value based on minority stake
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