Coca-Cola's Deal With Monster Implies A Valuation Of Up To $160 Per Share For Monster

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 |  About: Monster Beverage Corp. (MNST), Includes: KO
by: Edward Vranic, CFA

Summary

Coca-Cola is buying a 16.7% stake in Monster Beverage Corp. for $2.15 billion.

Coca-Cola is giving its energy drinks business to Monster, a division with over $1 billion in estimated annual sales.

Monster is giving its non-energy drinks business to Coca-Cola, a division with less than $200 million in annual sales.

Coca-Cola (NYSE:KO) announced an investment stake and business partnership with Monster Beverage (NASDAQ:MNST) on Thursday. KO will be entitled to a 16.7% equity stake in MNST for $2.15 billion. The deal includes an exchange in businesses, where KO will transfer ownership of its worldwide energy drinks business to MNST, and MNST will transfer its non-energy drinks business to KO. I will attempt to come up with a rough valuation for this deal in this article.

The monetary piece of this deal is very straightforward. KO is paying $2.15 billion for a 16.7% equity stake in MNST post-issuance. MNST has 167.18 million shares outstanding prior to the deal, so an additional 33.52 million shares will lead to a 16.7% equity stake with 200.7 million shares outstanding. KO paid $64.14 per share in cash for the deal.

The tricky part to valuing this deal is the business exchange between the two companies. MNST is getting the NOS, Full Throttle, Burn, Mother, Play and Power Play, and Relentless brands, while giving up its Hansen's Natural Sodas Peace Tea, Hubert's Lemonade, and Hansen's Juice products.

According to MNST's 2013 Annual Report, $2,412.4 million of its $2,586.5 in gross sales were from its flagship brand, meaning the balance of the $174.1 million in revenue can be attributed to the non-energy drinks product line. Q1 and Q2 have shown a similar trend, where 2014 annual gross sales figures of the non-energy drinks business should broadly trend towards the $170 million to $200 million range.

KO does not report the revenue of its energy drinks division, but research from the Caffeine Informer estimated that 2013 sales of NOS and Full Throttle in the United States were a combined $378 million, and that worldwide sales of Burn were $700 million, so total sales of KO's worldwide energy drinks business exceeds $1 billion annually. There is over $800 million variance in annual revenue between what MNST gave up and what it is receiving from KO. Besides the obvious positive implication on MNST's growth rate and profitability going forward, particularly outside of the United States where MNST's presence is weak, as well as the synergies created between the alignment of each other's businesses, this deal implies a value far beyond the $2.15 billion that KO paid to obtain that 16.7% equity stake.

KO has a Price-to-Sales ratio of 3.8, while MNST has a Price-to-Sales ratio of 5.0. Using a ratio of 4 and applying it to the $800M difference in revenues comes to a value of $3.2 billion. Under this non-discounted scenario, the total deal comes to $5.35 billion, for a 16.7% equity stake. That would lead to a $32 billion valuation, or $160 per share. Using a more conservative approach to account for the possible inflation of the sales numbers or price multiple, and discounting the $3.2 billion by 50%, leads to a $1.6 billion valuation, or $3.75 billion for the 16.7% equity stake. That would lead to a $22.5 billion valuation, or $112 share price for MNST.

This is just one very quick way to try to come up with a valuation for the deal between KO and MNST, but I believe that this deal is the prelude to KO buying out MNST in its entirety. The lucrative nature of this deal for MNST has tipped KO's hand, and it would be reasonable to expect a buyout offer some time down the road well in excess of $100 per share.

Disclosure: The author is long MNST. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.