ATLANTA -- The Coca-Cola Co. is shaking up the cold vault with a deal that gives it a 16.7-percent ownership interest in Monster Beverage Corp.
The Atlanta-based beverage giant is entering into a long-term strategic partnership with the Corona, Calif.-based energy drink company. The deal is expected to accelerate growth for both companies in the global energy drink category. In addition, the partnership leverages the respective strengths of Coca-Cola and Monster to create compelling value for both companies and their shareowners, according to the announcement.
Under the terms of the deal, Coca-Cola will acquire an approximately 16.7-percent ownership interest in Monster (post issuance) and will have two directors on Monster's board of directors. Coca-Cola expects to account for its investment in Monster under the equity accounting method.
Coca-Cola will transfer ownership of its worldwide energy business, including NOS, Full Throttle, Burn, Mother, Play and Power Play, and Relentless, to Monster. In turn, Monster will transfer its non-energy business, including Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade and Hansen's Juice Products, to Coca-Cola.
As for distribution, the two companies will amend their current agreement in the United States and Canada by expanding into additional territories and entering into long-term agreements. Coca-Cola will become Monster's preferred distribution partner globally and Monster will become Coca-Cola's exclusive energy play.
These agreements will deliver sustainable value to Coca-Cola's global system and accelerate Monster's opportunity to grow internationally, the companies said in a joint news release.
At the deal's closing, Coca-Cola will make a net cash payment of $2.15 billion and transfer its worldwide energy business to Monster. In exchange, Monster will issue to Coca-Cola the shares of Monster common stock, transfer its non-energy business to Coca-Cola, and enter into expanded distribution arrangements.
A Win-Win for Both Companies
According to Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities LLC, this deal will allow both companies to capitalize on each other's respective strengths.
"Overall, we think this partnership is a win-win for both companies, and we expect both stocks to trade favorably on this news with Monster trading up sharply," she said.
Given that the majority of Monster's sales -- about 80 percent -- are currently in the U.S., Monster is relatively underpenetrated internationally, with just a 15-percent share of the global energy category, which is approximately $40 billion in retail sales, Herzog explained. This new partnership will significantly accelerate Monster's international market share, she said, noting that Monster could generate four to five times its current international unit case sales by 2017.
According to Herzog, Coca-Cola has had "a difficult time gaining significant traction in the energy category and with this partnership agreement will be able to quickly gain access to one of the most attractive beverage categories in a capital efficient way, in our view."
The transaction, which is expected to close in late 2014 or early 2015, is subject to customary closing conditions, including receipt of regulatory approvals.
"The Coca-Cola Co. continues to identify innovative approaches to partnerships that enable us to stay at the forefront of consumer trends in the beverage industry," said Muhtar Kent, chairman and CEO of The Coca-Cola Co. "Our equity investment in Monster is a capital efficient way to bolster our participation in the fast-growing and attractive global energy drinks category. This long-term partnership aligns us with a leading energy player globally, brings financial benefit to our company and our bottling partners, and supports broader commercial strategies with our customers to bring total beverage growth opportunities that will also benefit our core business."
Rodney C. Sacks, chairman and CEO of Monster, added: "The transaction represents a unique opportunity for Monster and its shareholders. We gain enhanced access to The Coca-Cola Co.'s distribution system, the most powerful and extensive system in the world. At the same time, we become The Coca-Cola Co.'s exclusive energy play, with a robust portfolio led by our Monster Energy line and The Coca-Cola Co.'s energy brands. Our business will be bolstered by The Coca-Cola Co. energy brands we will acquire, providing us with complementary energy product offerings in many geographies, as well as access to new channels, including vending and specialty accounts."
Barclays served as financial advisor and Jones Day served as legal advisor to Monster. Skadden, Arps, Slate, Meagher & Flom LLP advised The Coca-Cola Co.