Coca-Cola Co's (NYSE:KO) $2.15 billion wager on a stake in Monster Beverage Corp (NASDAQ:MNST) highlights the growth-starved soft drink company's embrace of deals that fall short of a full-blown merger and acquisition but allow it to test-drive potentially risky targets.
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The world's largest soda maker said Thursday that it was buying a 16.7 percent stake in Monster. Coke will get two directors on Monster's board as well as Monster's non-energy brands, such as Hansen's Natural Sodas and Peace Tea. Monster will get Coke's energy brands, which include NOS and Full Throttle, as well as access to Coke's extensive distribution system.
Taking a minority stake instead of acquiring Monster outright gives Coke the opportunity to get the perks of being in a $27 billion global energy drinks market without taking on the financial and public relations risks that come with the controversial category, analysts said. If the deal closes as expected, Coke will distribute energy drinks but will not actually own them anymore.
One advantage for Coke is that deal involves less cash upfront than a full-on acquisition, which would have been at least $12 billion at Thursday's closing stock price. That is roughly equivalent to the amount of cash Coke had in hand at the end of July. "A couple of billion is something that Coke could handle without much difficulty," said Linda Montag, senior vice president at Moody's Investors Service.
Also, the gradualist approach allows Coke to sample at a distance a market in which it has a small presence and thus limited experience, with both the risks and rewards. The category enjoyed double-digit global growth in the mid-2000s, but as of late that has slowed. According to Euromonitor International, energy drink sales increased 7 percent in 2013 from the previous year.
There are other hazards with which Coke may want to get more familiar before doing a full deal. Energy drinks have been wrought with controversy in both the United States and international markets. The U.S. Food and Drug Administration said in 2012 that it was probing five deaths possibly linked to Monster Energy. The agency says it is still studying energy drinks but has not taken any action so far. Earlier this year, Lithuania banned the sale of high-caffeine drinks to minors, raising the question of whether other countries could follow its lead.
A Coke spokesman said Friday that the company has done its due diligence in evaluating Monster's legal proceedings. The deal notably keeps Coke at an arm's length from any future public relations battles facing the energy drinks industry.
"This is a category that faces ongoing scrutiny, fair or not," said Stephen Powers, an analyst at UBS. "Coke has always been wary of that because they face a lot of scrutiny themselves."
A deal between Coke and Monster has been speculated about for years. Coke shares were up 2 percent at $40.93 in Friday's trading while Monster's surged 30 percent to $93.07.
Indeed, a cautious approach does not necessarily mean the company is shutting the door on owning Monster some day. The company made investments in both Honest Tea and Zico Beverages, the maker of coconut water, before eventually buying them.
It could be pursuing a similar strategy with Keurig Green Mountain Inc (NASDAQ:GMCR): Coke bought a 10 percent stake in the single-service coffee brewing company earlier this year and raised it to 16 percent in May, making it Keurig's largest shareholder.
"This seems to be an evolving and accepted method for Coke to diversify and do it in baby steps before they go all in," Powers said.
(Reporting by Anjali Athavaley; Editing by Lisa Shumaker)