Coca-Cola Could Benefit From Acquiring Monster Beverage

Includes: KO, MNST
by: Jacob Steinberg

Last week, interesting news emerged regarding Coca-Cola (NYSE:KO) and Monster Beverage Corporation (NASDAQ:MNST). At one point, it was claimed that Coca Cola wanted to acquire Monster, which later got denied by Coca Cola, but later, the same claim was made for the second time. I don't know whether Coca Cola will eventually end up buying Monster, however, I will discuss the arguments for and against such a move.

Because Coca Cola already operates in almost every country in the world (i.e., 190 countries according to Coca Cola's latest yearly report), it has limited room for geographical growth. The company's future income growth will mostly stem from introduction of new products, acquisitions and price increases. On the other hand, Monster is a relatively smaller company with a lot of growth potential, especially outside the U.S. Monster is different from other companies that produce energy drinks because the company has a large variety of energy drink flavors. Most of Monster's competition offers only two or three different flavors at most.

Monster's market cap is around $11 billion. If Coca Cola wanted to buy the company, it would probably have to pay a premium over this price and we would probably look at a price tag between $13 and $15 billion. This would give Monster a P/E value above 50, which can indicate that the company is expensive. By 2012, Monster is expected to earn $1.94 per share, by 2013 it is expected to earn $2.33 per share and by 2014, it is expected to earn $2.97 per share. In the next five years, we are looking at an annualized growth rate of 16%. If we assume that Coca Cola has to pay $15 billion for Monster, it will look at a forward P/E ratio of 55 for early 2012, 43 for early 2013, 36 for early 2014, and 28 for early 2015. Is this worth it? It probably depends on Monster's growth rate after 2015, which is nearly impossible to predict.

Then again, Monster's growth might speed up even more after the company gains the brand name of Coca Cola. Currently Coca Cola is one of the most well-known, respected and desirable brand names in the world and the brand name alone can sell many products. Coca Cola's giant distribution network could carry Monster to places it hasn't been before, and this can fuel further growth for the company. Coca Cola's marketing can also stimulate further revenue growth for Monster. Also, keep in mind that very few restaurants and bars actually serve Monster beverages. If Monster were to join Coca Cola's brand, many restaurants and bars would end up offering the brand as Coca Cola has agreements with many bars and restaurants limiting them to offering only Coca Cola products as their non-alcoholic beverages.

Soda consumption in U.S. and some European countries has been falling for several years in a row due to health-related concerns. Some American states and France went even as far as imposing extra taxes on acidic drinks in the last few years. In the near future, most of soda companies' growth will come from emerging nations. Acquiring Monster can prove to be very profitable for Coca Cola in the long run, even though it will be an expensive buy at first. If Coca Cola ends up buying Monster, it will be the most expensive acquisition in the company's history of over 100 years.

In the medium term (three-five years), I am bullish for both Coca Cola and Monster.

Disclosure: I am long KO, MNST.