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Implications of Coca Cola's acquisition of a stake in Monster!

August 17, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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Any established brand can grow beyond a point if it introduces a new product line or acquires another entity to expand its product line. Well, this is the basic business wisdom but any acquisition requires a wholesome strategic analysis in order to strike an optimum balance between the existing brand and the incoming brand in terms of products, culture, perception etc. Perhaps, this is the reason that Coca Cola (KO) did not go all the way to acquire all of Monster Beverage (MNST) and instead chose stop at an asset swap and a 16.7% stake (as per reports).

Not all the way, why?

As per Coca Cola’s management, the company chose caution while proceeding with the Monster deal in order to protect its brand image from a company that urges consumers to “unleash the beast” with products like Assault and Khaos. The maker of famous products Coca-Cola, Sprite and Fanta is already wrestling with attacks from politicians who blame sugary sodas for obesity and diabetes and hence, it wants to keep at arm's length from the more serious public relations battles facing the energy drinks industry, including an FDA probe over deaths possibly linked to Monster.

Now, even though Coca Cola did not go ahead with a full acquisition, there are going to be reasonable implications of this deal. Monster sold $3.1 billion in energy drinks in 2013 in the US, versus $3.4 billion for Red Bull. Monster's energy drink sales are rapidly rising in the US. Monster will likely be the number one energy brand in the US by 2014 or 2015. Thus, alignment of Coca Cola’s energy drink brands including NOS and Full Throttle with the Monster’s existing portfolio will create an explosive business that will accelerate at considerable speed. Monster already has an established competency in selling energy drinks as evidenced by its sales numbers and the company might likely be able to position the NOS and Full Throttle brands for faster growth domestically than Coca-Cola has been able.

The synergy

On the other hand, Coca Cola will also benefit from inclusion of Monster’s non-energy drinks including Hansen’s Natural Sodas and Peace Tea. In the second quarter of 2014, increased prices for the Peace Tea line helped Monster in springing an earnings surprise. Net sales of Peace Tea for the second quarter were higher than in the comparable period in 2013. The Peace Tea brand was the 10th largest ready to drink tea brand in the US by 2013 revenue and even though Coca Cola has its own ready to drink tea brands, it is still not a dominant player. Thus, addition of Peace Tea brand will definitely bode well for the company and its investors.

Coca Cola is a major player in the non-energy sector but as I mentioned above, its presence in the energy drinks sector is bleak. Monster is currently performing at its best as was seen in the last quarter wherein it beat the EPS consensus estimate by approximately 6% as the earnings increased around 31.5% year-over-year. Thus, the acquisition of a 16.7% stake could be provide a lucrative entry window to Coca Cola into the non-energy drink sector thereby complimenting an existing healthy product line.

Takeaway

Also, Coca Cola has a high dividend yield of around 3% complemented by a rich history of shareholder value generation. Coca-Cola has managed to grow revenue per share and dividends per share by about 9% a year over the last decade, despite headwinds from the slowly declining soda industry. Hence, this acquisition is another credible reason for prospective investor to include this

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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