ATLANTA -- The Coca-Cola Co. showed a renewed interest in energy drinks this month with the introduction of vitaminwater energy. And at a time when Coca-Cola's growth is challenged, analysts are again raising the prospect of the beverage maker acquiring Monster Beverages, partially because of the benefits the purchase would bring, and partially because of the pain Coca-Cola would suffer if someone else bought Monster.
Coca-Cola distributes roughly half of Monster Beverage's various drinks to retailers across the United States, analysts say. The Monster relationship will generate an estimated 13% of Coca-Cola's North American operating profit and 3% on a global basis in 2015, according to Stifel Nicolaus analyst Mark Swartzberg, as cited in a CNBC report.
That income could vanish quickly if Monster were sold to a strategic buyer that decided to take away Coca-Cola's piece of the Monster distribution. Take Anheuser Busch InBev. While state laws often prohibit beer companies from owning their own distributors, several partner distributors of A-B InBev currently work with Monster and would surely enjoy the added volume, according to the CNBC report. AB InBev declined to comment.
Similarly, PepsiCo could likely find big synergies if it acquired Monster and added the energy-drink company's products to its normal distribution routes. While U.S. beverages are less important to PepsiCo than Coca-Cola in terms of revenue and profit, the two companies face similar challenges in the domestic soda market. PepsiCo declined to comment to CNBC, but the company has said it is focused on smaller tuck-in acquisitions.
If Monster were gobbled up by a rival, the pressure on Coca-Cola to meet its long-term targets would likely intensify, the report stated. The company has a target of doubling its 2010 revenue by 2020—including any acquisitions—which implies a roughly 7% annual growth rate. Unfortunately, that has proven a tough pace to achieve. Coca-Cola's companywide organic revenue grew 6% in 2012 and 3% in 2013.
A natural solution would be for Coca-Cola to acquire Monster. The deal looks attractive both because of Monster's own sales growth, as well as the opportunity to distribute its products to more locations, many of which Coca-Cola already serves. Indeed, a deal would add an estimated 4% to companywide revenue in 2015 and 10% to operating profit, Swartzberg said, according to CNBC.
Monster shares look like a reasonable deal considering its growth outlook. While Coca-Cola's U.S. carbonated-drink unit volume declined 2.2% in 2013, Monster's rose by 7.7%, according to Beverage Digest.
And Monster has only begun to expand overseas, where it generates about a quarter of revenue. By contrast, RBC Capital Markets analyst Nik Modi said 70% of global energy drinks are sold outside the U.S., suggesting there is plenty of runway for Monster.
The key risk for Monster investors has been concerns that its caffeinated drinks were a health risk. But while worries around diet cola appear to have lingered through 2013, Monster's sales have bounced back.
U.S. unit volume growth of Monster drinks fell to the low single digits in March 2013, when media mentions of the company peaked, according to Modi. But by the end of the year, Monster's volume returned to double-digit growth, as the negative headlines quieted, CNBC reported.
What's more, attempts to ban Monster drinks have had little success. In Maryland, for instance, there was an attempt to prevent the sale of energy drinks to minors, but the state Assembly's economic matters committee voted against it by 22 to 1 last month.
Coca-Cola appears to have a cautious stance on large acquisitions. While it bought vitaminwater parent Glaceau for $4.1 billion in 2007, Monster is much larger with a market capitalization of $11 billion. Since 1995, Coca-Cola has spent $28.7 billion on acquisitions, compared with $45.4 billion for PepsiCo, according to Dealogic. Coca-Cola declined to comment.