Shares of Monster Beverage (MNST) have seen a turbulent trading day. Shares hit an all time high of $83.96 intra-day, up 24% on the day as rumors about a possible takeover by Coca Cola (KO) resurfaced again. Shares closed the day 1% lower after Coke made a statement in which they declined to be in discussion about a possible takeover.
The takeover rumors started this morning when The Wall Street Journal published an article in which they stated that Coca Cola was in talks to acquire Monster Beverage, according to people familiar with the matter.
An acquisition could expand the soft drink maker's presence in the global energy drink market. Monster Beverage is known from its rapidly growing "Monster" brand, which was the driving force behind the company's reported 31% revenue growth for 2011. Coca Cola reported 25% revenue growth for its energy division which includes names as Full Throttle, Fuze, Burn and Gladiator.
A possible deal would most likely surpass the 2010 acquisition of the North American operations of Coca-Cola Enterprises for $12.2 billion. In order to finance a possible takeover Coca-Cola would most likely have to sell some of its bottling operations.
Analysts point out that a possible acquisition will be expensive. At today's valuation, the company will need to pay at least $13 billion in order to justify convince selling shareholders. Problematic is the fact that synergies might be relatively limited as the companies already have a distribution agreement in which Coca-Cola sells the Monster energy drink. A possible acquisition of Monster might create a sizable competitor against Austria's Red Bull.
Hansen Natural as the company was previously named has long focuses on selling sold juices and sodas. After introducing the energy drink "Monster" in 2002 the entire company has been transformed into an energy drink company and the company changed its name into Monster Beverage. The drink now makes up about 90% of annual sales.
Coca Cola sent out a pretty definitive denial late Monday. "At this time, we are not in discussions to acquire the Monster Beverage Corporation," the company said in a statement. "We continue to review the best ways to maximize the value of our relationship."
Monster Beverage ended its fiscal 2011 with $771 million in cash and equivalents. The company operates without debt for net cash position of $771 million. Shares are valued at roughly $11.5 billion at today's close of $65 which values the operating assets of the firm at $10.8 billion. This values the firm at 6.3 times annual revenues and 38 times 2011's earnings. The valuation compares to Coca Cola's own valuation of 3.7 times annual revenues and 20 times earnings.
Currently the company does not pay a dividend.
Long term investors of Monster have seen astronomical returns. Back in the days when the company was still called Hansen Natural, shares started an enormous run up on the back of the successful Monster energy drink. A decade ago shares traded around $0.25 (adjusted for stock splits) and now trade around $65 per share.
The company has seen exploding demand for its Monster energy drink, which not only boosted revenue growth but also allowed it to report some of the fattest profit margins in the entire beverage industry. The company's net profit margin of 16.8% reported for 2011 is unheard of amidst fear competition from market leader Red Bull, as well as large soft drink players who entered the energy drink market.
At rich valuation multiples of 6.3 times 2011's annual revenues and 38 times annual earnings, investors are most likely hoping for a buyout as it remains to be seen how much value the company can create in a stand-alone scenario. In any case, the global growth roll out will go much faster and smoother if it has access to Coca-Cola's distribution capabilities.
If a takeover does not materialize there is quite some downside for shares of Monster Beverage as shares have already returned 40% year to date on the back of the rumors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.