Coca-Cola to Acquire 17% Stake in Monster Beverage

Coca-Cola Co., the world’s largest beverage company, agreed to swap some brands and buy a 17 percent stake in Monster Beverage Corp. for about $2.15 billion, increasing its bet on the burgeoning energy-drink market.

The move is part of a deal that will include the transfer of Coca-Cola’s energy drinks NOS, Full Throttle, Burn, Mother and Play to Monster, according to a statement yesterday. Monster, meanwhile, will shift Hansen’s natural sodas and juices, Peace tea and Hubert’s lemonade to Atlanta-based Coca-Cola.

Under the agreement, the two companies will share marketing, production and distribution. Coca-Cola, which already distributes Monster in the U.S. and Canada, will expand the arrangement globally, helping the energy brand grow overseas.

“It gives them exposure to one of the fastest-growing segments of carbonated soft drinks globally,” said Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co. “The category’s growth is clearly slowing in the U.S., but the potential is very strong globally.”

Monster rose 30 percent to $93.49 at the close in New York for the biggest gain since May 1996. Coca-Cola gained 1.7 percent to $40.88.

The energy-drink maker will look to transfer all of its U.S. and Canada distribution to Coca-Cola, Monster Chief Executive Officer Rodney Sacks said during a media call. Coke and Leuven, Belgium-based Anheuser-Busch InBev NV share distribution in the two countries.

Larger Stake

Coca-Cola has the right to purchase as much as 25 percent of Monster, whose directors would have to approve any larger investment.

“There is always an opportunity on a mutually agreeable negotiated basis to go further,” Sacks said. “What will be will be will be. We are happy running it.”

The U.S. accounts for about 80 percent of Monster’s sales, leaving plenty of room for Coke to help expand the brand internationally, Bonnie Herzog, an analyst with Wells Fargo & Co. in New York, said in a note after the announcement.

“Monster is relatively underpenetrated internationally,” she said, adding that the company has 15 percent of the global energy-drink category, which is worth about $40 billion at retail. “This partnership will significantly accelerate Monster’s international market share.”

Coke’s Pattern

The investment fits into Coca-Cola’s strategy of taking equity stakes in promising new brands and technologies, especially as its main source of revenue is under threat from a shift to healthier habits. In May, Coca-Cola said it would boost its stake in Keurig Green Mountain Inc. to 16 percent, making it the coffee brewer’s largest shareholder.

“There is a pattern here, and this is what we are talking about in terms of a different approach to innovative partnerships,” Coca-Cola CEO Muhtar Kent said during the media call. “We look at deploying capital in an intelligent and efficient manner to get us a very important footprint in growth categories.”

Coca-Cola also will add two directors to the board of Corona, California-based Monster.

While Coca-Cola has helped distribute Monster since 2008 and owns smaller brands such as Full Throttle and NOS, it doesn’t have its own major energy drink. Monster and Red Bull, owned by Austria’s Red Bull GmbH, have the largest share of the market worldwide, according to Morningstar Inc.

Skadden, Arps, Slate, Meagher & Flom LLP advised Coca-Cola on the deal. Barclays Plc served as Monster’s financial adviser, while Jones Day provided legal counsel.

Regulatory Risk

Coca-Cola explored an acquisition of Monster in early 2012, a person familiar with the matter has said. The talks ended without a deal because Coca-Cola decided that Monster’s asking price was too high, according to the person.

The deal will close late this year or in early 2015 after necessary regulatory approvals, the companies said.

Both Kent and Sacks downplayed moves by U.S. regulators in recent years to investigate energy drinks’ caffeine content. Kent said the drinks have been consumed safely and studied for more than two decades. Sacks reiterated his contention that caffeine is safe in the levels found in Monster.

“The caffeine content in our beverages is sometimes misconceived,” Sacks said. “It’s perceived to be very high. In fact, it really is half, on an ounce-for-ounce basis, of a Starbucks cup of coffee.”

Given the regulatory concerns, buying a minority stake is less risky for Coke, Dibadj said. The soda maker may end up buying the rest of the business once the smoke clears, he said.

Still, it may not have benefited as much by waiting to act, he said.

“Coca-Cola should have taken this move faster,” Dibadj said.