Has Monster Lost its Appeal as a Takeover Target?

Legal probes likely to cool interest of investors, potential buyers

CORONA, Calif. -- Three months ago, it was heavily rumored that Coca-Cola Co. was close to purchasing Monster Beverage Corp.--though Coca-Cola denied it repeatedly. Today, the likelihood of a Monster buyout seems about as distant as can be as the energy-drink maker prepares to defend itself against a lawsuit and an investigation by the Food and Drug Administration.

Investors have been spooked, according to a Wall Street Journal report, that the company could increasingly land in regulators' cross hairs amid a public debate over whether it is healthy to imbibe such high-octane drinks, which promise a lift through unregulated ingredients such as taurine, ginseng and guarana.

The debate is injecting uncertainty into the energy-drinks industry, raising the specter Monster and others could be forced to slap bigger warning labels on their products and roll back marketing claims--or in an extreme scenario, be prohibited from selling their beverages to teenagers.

The uncertainty makes it less likely a bigger rival such as Coca-Cola Co. will swoop down any time soon to acquire Monster, according to the report, even as Coke and its chief competitor PepsiCo Inc. increasingly branch into fast-growing new drink categories amid flat U.S. soda sales.

Publicly traded Monster, based in Corona, Calif., is the largest energy-drink company in the Unites States by volume, ahead of Austria's closely held Red Bull GmbH. The niche category could top $10 billion in U.S. retail sales this year.

Monster's share price plunged a combined 23% Monday and Tuesday, after the Food and Drug Administration said it was investigating reports five people have died since 2009 after consuming the company's drinks. That followed a wrongful-death lawsuit filed against Monster last week by the parents of a Maryland teen who died of cardiac arrest and caffeine toxicity after allegedly drinking two 24-ounce cans of Monster. The girl had mitral valve prolapse, a pre-existing heart problem.

 Monster said Tuesday it stands by the safety of its products, is unaware of any fatality caused by its beverages and will vigorously defend itself against the lawsuit involving 14-year-old Anais Fournier, who died last December.

"With the negative PR associated with both the [energy drinks] category and the Monster brand right now, we are quite sure [Coke] will keep its distance for the foreseeable future,'' Wendy Nicholson, a beverage analyst at Citi Research, wrote in a research note this week, according to WSJ.

U.S. regulators have capped caffeine at roughly 6 milligrams an ounce for traditional sodas, such as cola, under a decades-old rule, but haven't done the same for energy drinks, many of which are marketed as dietary supplements and subjected to less government oversight.

But pressure is growing. Monster, along with AMP maker PepsiCo and Living Essentials LLC, maker of 5-hour Energy, received subpoenas in July from New York State Attorney General Eric T. Schneiderman, who is investigating the companies' marketing and health claims.

Monster said its energy drinks contain about 10 milligrams of caffeine an ounce, less than half the concentration of leading coffee-house brews.

But a recent study suggests energy drinks do not always divulge how much caffeine they contain, and when an amount is listed on a label, it is not always accurate, Consumer Reports magazine has found, as cited by Reuters.

According to a study released on Thursday by the magazine, 11 of the 27 top-selling energy drinks in the United States do not specify the amount of caffeine in their beverages. Of the 16 drinks that did list a specific caffeine amount, five had more caffeine per serving than was listed, and the average amount over was more than 20%.