In a note today initiating coverage on Monster, Bonnie Herzog from Wells Fargo Securities advanced this suggestion, noting that Coke and AB InBev had always been talked about as potential buyers of the energy behemoth due to their distribution agreements with it.
As recently as February 2013, the Wall Street Journal reported rumors that Coke was exploring an acquisition of Monster, she said, which led to an 8% share price jump, though this was relatively small compared to the 28% hike that followed similar rumors reported in the WSJ in April 2012.
“We believe the smaller spike in the share price is attributable largely to the overhang of outstanding legal issues,” Herzog wrote.
“Given the potential liability, we suspects any potential buyer will likely wait on the sidelines until all outstanding issues have been resolved,” she added.
Law suits law suits everywhere, but only Monster to drink…
Herzog then detailed the outstanding legal actions Monster faces: from alleged channel stuffing (Cunha v. Hansen Natural Corp, filed 2008) to the suit brought by New York AG Schneiderman and San Francisco city attorney Dennis Herrera looking at whether it marketed caffeinated drinks to kids.
Two product liability lawsuits – relating to the deaths of Anias Fournier, 14 and Alex Morris, 19 – filed in 2012 and 2013 are also ongoing, as is a marketing suit brought by Herrera for alleged mislabelling, unfair and misleading business practices.
“Assuming the legal issues are resolved, we believe that Coke is still the most likely buyer of Monster given the distribution agreement the two companies have,” Herzog said.
However, we believe potential upside in a Coke acquisition would be somewhat limited,” she added.
Having paid x20 EBITDA for Glaceau Vitamin Water ($4.1bn in 2007) Herzog believes Coca-Cola would be reluctant to pay such a high premium again.
“However, given the challenges of the CSD market in the US, we believe there is still a possibility that Coke would be interested in…potentially paying a similar multiple for Monster, which would represent a 25-30% premium based on our 2014E EBITDA estimate [$746m].”
Can Monster play Pepsi, Coke at their own game?
Herzog’s mention of challenges in CSDs (excluding energy) are interesting, since the analyst notes that the $10.3bn energy category led by Monster (42% volume share) is winning shelf space from diet drinks, with one factor being the higher margins retailers earn on energy drinks versus CSDs.
“We believe products like Monster Ultra Zero are leading share gainers in this ongoing switch away from diet CSDs,” Herzog writes, noting energy growth of 25.2% over the last decade compared with a CSD decline of 1.7%.
But despite doldrums decline in CSDs, Herzog believe Monster can profit by winning even a tiny share of the market for colas and flavored carbonates, with a 1% share representing $660m in sales.
“The successful Monster Zero Ultra appears to already be making headway into the CSD category with its more traditional CSD taste,” she wrote, citing CEO Rodney Sacks comments that it the launch is “more on a soft drinks vein”.
The non-carbonated opportunity was not so large, Herzog said, but Muscle Monster is still the second-most popular RTD protein supplement, while coffee RTD Monster Java has also seen success.
Non-CSD categories tend to be more innovation focused, with lower competitive barriers for Monster to overcome, Herzog added, while the brand’s popularity with C-store operators means it has an edge in the battle to secure cooler space.