Coke investment reveals half-empty idea bottle

August 15, 2014

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Coca-Cola’s latest investment reveals its idea bottle to be half empty. The $180 billion soda giant is paying $2.2 billion for 17 percent of Monster Beverage, a maker of trendy energy drinks. It goes to show how even a global powerhouse with significant distribution and marketing advantages can struggle to keep ahead of upstart rivals. At least Coke got the deal formula right.

In 1905, its slogan was “Coca-Cola revives and sustains,” suggesting it was hip to the idea of selling drinks as a kind of elixir over a century ago. It forgot the message and missed the modern rise of the category, though. That has led to a steady drumbeat of speculation it might buy Monster. In 2012, news reports suggested the companies were in talks, but Coke later denied it.

Coke’s efforts in fast-growing energy drinks have been lethargic. Nos, Full Throttle and other Coke energy brands accounted for just $330 million of net sales last year. That compares with more than $2 billion of revenue in the space for Monster, according to a presentation that accompanied Thursday’s deal. Coke is estimated by industry tracker Euromonitor to claim just 5 percent of the U.S. market.

Buying a piece of Monster is thus a capitulation of sorts, though Coke hasn’t caved in financially. The terms suggest Coke is paying a 10 percent discount to where Monster shares closed on Thursday, analysts at Bernstein Research reckon. Coke also will swap its energy brands for Monster’s “natural” sodas and teas. Based on their respective sales and the multiples of revenue at which the companies trade, Breakingviews calculations suggest Coke could be transfering about another $1 billion of value to Monster.

Throw in the two board seats Coke is getting at Monster and an expansion of their existing delivery partnership, and there seems to be a reasonable balance in the transaction. It sure beats paying a fat premium for a business that easily could be displaced by newcomers like coconut water. Coke’s shares gained 2 percent on the deal, enough to cover the cash outlay. So while the company’s innovation lab may be flat, its financiers still have some fizz.

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