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May 15, 2012

Rumoured Monster Acquisition Consistent with Coca-Cola’s Vision

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By Jonas Feliciano, Beverage Analyst at Euromonitor International

Coca-Cola concluded the final day of April by denying speculation of a “monster” acquisition, but, in retrospect, the cola giant would do well to target this energy leader.

As first reported by the Wall Street Journal on 30 April 2012, The Coca-Cola Company explored a deal to acquire energy-drink company Monster Beverage Corp. However, due to Monster's market capitalization of US$11 billion, many shareholders balked at a transaction that would represent Coca-Cola's largest brand acquisition to date. Although Coca-Cola has stated that they are not in talks to purchase Monster “at this time,” a review of the energy drinks market shows this deal would be in line with Coca-Cola's other purchases.

Coca-Cola acquisitions show investment in the future

Coca-Cola has not been shy about acquiring brands across the soft drink market to diversify its offerings and regional presence. As carbonated beverages have slowed in growth due to consumer health and wellness concerns, the company has expanded its portfolio to better capitalize on beverage trends. This tactic was evident and ultimately successful with their 2007 acquisition of Glaceau, gaining access to the popular Vitaminwater line for US$4.2 billion. The wheeling and dealing has not ceased since. In December 2011, Coca-Cola reached an agreement with Aujan Industries for US$980 million, giving Coca-Cola approximately 50% equity in the high-growth Middle East and Africa region for non-carbonated beverages. And, in keeping up with the growing fruit and vegetable juice industry, Coca-Cola acquired a majority stake in ZICO Coconut water, finalising the deal in April 2012.

All these transactions showcase Coca-Cola's continued ability to view the soft drink market in terms of future impact, rather than immediate returns. The Vitaminwater acquisition made Coke the leader in the growing functional bottled water category, which posted a 2006-11 CAGR of 16.3% for US off-trade volume. The Aujan deal solidifies Coca-Cola's position in the Middle East and Africa, where Aujan's expertise will shore up TCCC's regional weakness in still beverages. And the ZICO deal gives Coca-Cola a true partner in the growing coconut water category.

Why a “monster” deal makes sense

At first glance, many may think that Coca-Cola's interest in Monster is due solely to the beverage's success in the North America, where is leads energy drink volume share. In this region, the energy drinks category is definitely growing, and Monster would give Coca-Cola close to a majority brand share. This would have a real impact on Coca-Cola's North American operations where the acquisition could translate into an additional US$3.4 billion in off-trade retail sales by 2016, even if Monster's market share remains static. But many have chided this position because they fear that energy drinks are reaching maturity in the US; others point toward increased scrutiny by government officials into the health and safety of energy drinks. For these reasons, when word of the potential deal broke and rumours flew concerning the cost, stockholders cried foul. But to truly understand the potential value of a Monster acquisition, one should look south.

Off-Trade Brand Share and 2011-16 Forecasted CAGR 

5

Monster has proven a massive success in the US, backed by strong distribution partnerships with both Coca-Cola and Anheuser-Busch. But, the target area of growth for Monster, if backed by Coca-Cola's distribution and marketing strength, is Latin America. With a forecasted off-trade volume CAGR of 13.6%, the combination of Monster's success as a product amongst US consumers paired with Coca-Cola's regional bottling and distribution could make Monster Energy a leader of a category expected to surpass US$4 billion in off trade sales by 2016 in Latin America alone. Similar to the Glaceau deal, Coca-Cola would be at the head table for a growing category and could provide that category further strength. And, similar to the Aujan deal, the acquisition positions Coca-Cola as a player in growing regions as well as diversifying their portfolio. Likewise, in more mature regions, such as Australasia, the combination of Monster Energy backed by Coca-Cola's formidable distribution network plus the latter's existing stable of energy brands could prove a powerful one-two punch in the ongoing battle with Red Bull.

So while the valuation of the Coca-Cola/Monster deal cannot be easily determined and may yet prevent this transaction from occurring, one thing is clear: the acquisition has the potential to further strengthen Coca-Cola's future outlook, meshing well with the company's emerging long-term vision. 

 


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