The world’s largest soft-drink company, Coca Cola (KO) was considered as a sleeping giant before its recent move to acquire large equity stake in Keurig Green Mountain (GMCR) and energy drink producer Monster Beverage (MNST). Wall Street analysts’ interest in Coke has suddenly perked up, besides the growing interest of Coke’s investors after such news flew in. Let’s find out the real story and how owning both the stakes prove beneficial for the company per se.
The Story In The Backdrop
The company acquired an equity stake of 16% in Keurig, a leader in single-serve coffee brewers. Also, very recently Coke bought 17% stake in Monster Beverages for $2.5 billion, a major producer of “alternative” beverages – “Monster Energy” is a famous drink under the latter’s emblem and it also produces ready to drink diary and coffee drinks which have captured immense market attention.
Both the companies in which Coke has bought stake have been benefitted with share price appreciation soon after the news was released in the market. Analysts are expecting that as the future of the two companies are now entwined with Coke; their stocks are destined to move to even higher levels.
Quite remarkable was the news of Keurig zooming to a 52-week high of $128 per share in June from $95 in May. On August 19, it has closed at $117 but analysts’ expectations state that the growth trajectory for Keurig is not a temporary phase but is slated to continue. Also, thanks to the Coca-Cola connection, shares of Monster Beverage has jumped to $93 in August from $64 in July.
According to S&P Capital IQ analyst, the acquisition of Monster would give Coke access to the largest player in the energy drink sector, aiding in offsetting the loss it’s making in the carbonated sparkling drinks business.
What Is Coke’s Game-Plan
As Keurig’s technology in both hot and cold coffee brewers is “industry leading” and the company is manned by a staff of 460 scientists, Coca –Cola is obviously going to learn the best technology from this association. Something worth mentioning on this point is that Keurig currently holds 320 patents and 244 patents are pending. Coca-Cola’s growth in international markets such as Western Europe and Japan is almost guaranteed after this synergic association, and thus, Coke has taken a large stake in Keurig.
There is a big project which is still in pipeline which would involve Coca-Cola and Keurig working in collaboration. Both the companies are investing on development of a Keurig cold beverage system that can instantly deliver freshly prepared carbonated, sparkling and still beverages. Such a beverage system would help in improving market base of Coca-Cola by creating new markets for the company.
And similarly, Monster Beverage could aid in expanding markets in the U.S. as well as overseas for the company. Coca-Cola is expected to take on some of the Monster’s distribution relationships, and the two companies will work in liaison for pursuing international expansion plans. Coca-Cola’s CEO, Muhtar Kent commented – “We are impressed with Monster’s performance and are confident in Monster’s ability to perform over the long-term.”
In a bid to allow Monster focus entirely on energy drinks, Coca-Cola is transferring ownership of its energy drink brands — NOS, Full Throttle, Burn, Mother, Play and Power Play and Relentless — to Monster. Instead, Monster will transfer its nonenergy drinks brands — Hansen’s Natural Sodas, Peace Tea, Hubert’s Lemonade and Hansen’s Juice Products — to Coca-Cola. This deal marks the union of the biggest soda maker in the World with the largest energy drink brand in the U.S.
As sales from carbonated soft drinks are on a decline for Coca-Cola in the U.S, it strives to pull up its beverage section which is still growing at a modest rate. Truly, Coca-Cola is dramatically beginning to use such deals for strengthening its foothold in the U.S. and for enhancing its growth curve. It has taken the smartest move to grow its beverage business which holds promise, even when sales from carbonated drinks have started to dwindle.