Monster Beverage Corp. (MNST)’s escalating profit from energy drinks pumped full of caffeine and nitrous oxide may tempt acquirers to chase what would be the most expensive takeover in the industry’s history.
After the stock more than doubled in the last year, Monster Beverage was valued last week at 20 times earnings before interest, taxes, depreciation and amortization, the priciest of any North American soft-drink maker greater than $500 million, according to data compiled by Bloomberg that includes net debt. The $10.4 billion company, which got its start selling juices in the 1930s, has the highest operating margins in the industry and is projected to boost earnings 70 percent in the next three years, analysts’ estimates compiled by Bloomberg show.
Coca-Cola Co. (KO) may be among interested buyers, said Credit Agricole Securities USA Inc. and Goldman Sachs Group Inc., to capture a bigger chunk of U.S. alternative beverage sales estimated to have reached almost $32 billion last year, according to the Beverage Marketing Corp. The Corona, California-based company could be worth $74 a share in a takeover, said Gabelli & Co., 24 percent more than last week’s close. Even without a premium, it would already be the highest Ebitda multiple on record for a takeover of a non-alcoholic beverages company greater than $1 billion, the data show.
“What Monster’s so successfully done in the last few years is proven that demand for energy drinks is fairly universal among young people,” Caroline Levy, a beverage and household products analyst for Credit Agricole in New York, said in a telephone interview. “This business is now too big to ignore. If you’re a player in soft drinks, I think it’s very hard not to be in the highest-margin, highest-growth category out there.”
Judy Lin Sfetcu, a spokeswoman for Monster Beverage, declined to comment on whether the company has been approached about a sale.
“Were we to receive an acquisition proposal, our board of directors would carefully consider whether any such proposal is in the best interests of our stockholders and act appropriately,” she said in an e-mailed statement.
Kent Landers, a spokesman for Coca-Cola, said the company doesn’t comment “on market rumors or speculation as it relates to M&A.”
Monster Beverage, formerly known as Hansen Natural Corp., sold juices and sodas under the Hansen name before introducing the first Monster Energy products in 2002 to capture growing demand for drinks made with added caffeine or supplements to deliver an energy boost. Monster brands, ranging from coffee- based Java Monster to its Nitrous drink injected with nitrous oxide, now account for about 91 percent of sales, according to the company’s most recent annual statement.
‘Gangbusters’ in Growth
Monster Beverage’s revenue climbed an average of 24 percent in each of the past five years, compared with average annual sales growth of 15 percent for Coca-Cola and 14 percent for PepsiCo Inc. (PEP) in the same period, according to data compiled by Bloomberg. Monster’s operating margin of 27 percent in 2011 was the highest among publicly traded North American soft-drink companies with a market value greater than $500 million, the data show.
“They are going gangbusters in the growth sector,” Thomas Mullarkey, a Chicago-based analyst at Morningstar Inc., said in a phone interview.
As Monster Beverage’s sales and profits climbed, its stock more than tripled in the past five years to $59.57 on March 9. The 111 percent gain in the last year through last week was the second-highest in the Standard & Poor’s Midcap 400 Index. (MID) The shares were little changed at $59.59 today in New York.
‘Justifies the Valuation’
Monster Beverage’s equity and net cash was valued last week at 20 times Ebitda of $474 million last year, compared with Coca-Cola at 14 times and Purchase, New York-based PepsiCo (PEP) at 9.9 times, data compiled by Bloomberg show. North American soft- drink makers with market capitalizations greater than $500 million were valued at a median of 8.7 times. Monster Beverage is also more expensive relative to sales and book value than any other company in the industry, the data show.
“They’re showing very strong sales growth and very strong earnings growth,” Judy Hong, an analyst at Goldman Sachs in New York, said in a phone interview. “The growth itself, in part, justifies the valuation.”
With analysts estimating that pretax earnings will climb 70 percent (MNST) in the next three years to $803 million, the company was only valued at 12 times estimated 2014 Ebitda, data compiled by Bloomberg show.
Energy Drink Sales
Energy drinks -- designed to deliver a mental or physical boost with ingredients such as caffeine, sugar and supplements - - have gained in popularity in recent years along with other alternatives to traditional soft drinks. The segment was the fastest-growing category of the U.S. liquid refreshment beverage market in the five years ended in 2011 with a compound annual growth rate of 11.9 percent, according to data and estimates from Beverage Digest and Goldman Sachs.
On a wholesale basis, energy drink sales climbed 45 percent to $4.37 billion from 2006 to 2010, the latest year for which finalized data is available, according to Gary Hemphill, senior vice president of the Beverage Marketing Corp., a New York consulting firm. Monster and its main competitor Red Bull GmbH each account for about 30 percent of the U.S. market, he said.
Domestic U.S. wholesale sales for the so-called “alternative” beverage category -- ranging from energy drinks to juices, coffees and flavored water -- were about $31.9 billion last year, Monster Beverage said in a Feb. 29 regulatory filing, citing estimates from the Beverage Marketing Corp.
“The energy category continues to show remarkable strength,” Tom Pirko, founder of Bevmark LLC in Buellton, California, an adviser to the food and beverage industries, said in a phone interview. “It continues to grow and grow and the international prospects for a brand like Monster to compete against Red Bull are very good. There is tremendous upscale possibility here and I think Coke understands that.”
Coca-Cola, the world’s largest soft-drink maker, may be lured by the prospect of using its distribution networks abroad to bolster Monster Beverage’s international profit, according to Credit Agricole’s Levy and Hong of Goldman Sachs.
Coca-Cola, which has a market value of $157 billion, already distributes about half of Monster Beverage’s energy drinks such as Assault, Khaos and Rehab in the U.S. Acquiring the company would allow Atlanta-based Coca-Cola to tap earnings that Levy estimates will increase 20 percent annually over the next three years.
“We have written in the past that we think it’d be a really accretive acquisition for Coke, but that was about $3 billion of market cap ago,” said Levy of Credit Agricole. “The irony is it probably still would be very accretive to Coke. Certainly where the big upside would be is that Coke can put energy drinks into its distribution system globally.”
Even without a premium, acquiring Monster Beverage at last week’s enterprise value of $9.6 billion would equate to the richest Ebitda multiple ever for a takeover of a non-alcoholic beverage company greater than $1 billion, data compiled by Bloomberg show. At that price it would also be Coca-Cola’s second-biggest deal after its $12.2 billion acquisition of the North American operations of bottler Coca-Cola Enterprises Inc. in 2010, according to data compiled by Bloomberg.
“This would not be a takeover that was done on a numbers basis,” Liam Dalton, who oversees about $1.8 billion as chief executive officer of Axiom Capital Management Inc. in New York, said in a phone interview. “What they would basically be doing is trying to capture a brand, and when you’re trying to capture a brand it’s a different animal. It’d have to be viewed more as a strategic acquisition, not a financial acquisition.”
Monster Beverage may not be a willing target, said Mark Astrachan, an analyst at Stifel Nicolaus & Co. in New York.
“I don’t believe management is out there actively trying to sell the business,” Astrachan said in a phone interview. “I don’t think that’s really a motivating factor. They’ve been incredibly successful in running the business.”
Still, Anheuser-Busch InBev NV (ABI), the world’s biggest brewer, may be another logical bidder because it also distributes Monster Beverage’s products, Hong said. Louis Navellier, who oversees more than $3 billion at Navellier & Associates Inc. and owns shares of Monster Beverage, said closely-held Red Bull could pursue the company to increase market share in the U.S.
“If Red Bull’s serious about capturing market share in North America, they might want to just buy Monster,” Navellier, based in Reno, Nevada, said in a phone interview. “You do pay a premium for Monster, but hey, at least they’ve got growth.”
Patrice Radden, a spokeswoman for Fuschl am See, Austria- based Red Bull, said the company wasn’t considering buying Monster Beverage. Marianne Amssoms of Leuven, Belgium-based AB InBev, declined to comment on whether the company was weighing a bid for Monster Beverage.
Monster Beverage may be worth $74 a share in a takeover, said Gabelli’s Damian Witkowski, based on his estimate for $777 million in Ebitda next year. The company could probably get more than $70 a share in a takeover, according to estimates from Morningstar and Goldman Sachs.
“The industry’s growing quickly,” said Dalton of Axiom Capital. “It’s not so much a valuation story. If you are a strategic acquirer like a major beverage company and you’re trying to leverage the brand through your own distribution systems, then it could make sense.”