What a Monster, Constellation Merger Might Mean and Why Coca-Cola Could Be Key

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Monster Beverage

stock climbed early Tuesday as investors weighed up a possible merger between the energy drink maker and Corona brewer

Constellation Brands
.

Talks between the two over a potential combination are progressing, Bloomberg reported, citing people familiar with the matter. An agreement may be reached in the coming weeks, the report added.

Monster Beverage (ticker: MSNT) stock rose 1.2% shortly after the open, while Constellation Brands (STZ) slipped 2.5% lower.

Monster, of which

Coca-Cola

is a major shareholder, entered the alcoholic beverage market earlier this year, announcing its acquisition of craft beer and hard seltzer maker CANarchy Craft Brewery.

A merger with Constellation would be another major step into alcoholic drinks.

The two companies have similar market capitalizations – Monster Beverage at $43.7 billion and Constellation Brands at $44.3 billion, according to FactSet data. That wasn’t the case when reports of a potential tie-up first emerged in November as Monster stock has fallen around 8% since then. 

For that reason, RBC Capital Markets analysts see a merger of equals, with a 50-50 split between the shareholders of each company, as the most likely scenario if a merger ends up being agreed.

“A merger would create a total beverage company with over $14 billion in sales and over $5 billion in Ebitda,” analysts, led by Nik Modi, said. That could lead to potential cost synergies of around 3% of the combined company revenue, they added.

In the event of a deal not being agreed, a partnership or joint venture could be an option, Modi noted.

Coca-Cola is likely to be an “interested party,” in such a case, they said, given its rough 19% ownership of Monster and the energy drink maker’s access to Coca-Cola’s global distribution system.

“We think the primary motivation behind such a potential three-way partnership/JV could be to strengthen the Coke network internationally, allowing bottlers access to alcoholic beverages and strengthening their financial health with higher volumes,” Modi said.

But Coca-Cola could be more than just an interested party in proceedings, according to Stifel analysts. Given that Constellation’s current enterprise value is 32% higher than Monster’s, they said a merger of equals would likely lead to “Constellation acquiring Monster and paying a premium to do so,” they said.

However, that scenario has limited synergy potential and could even be disruptive to Monster’s business, they added.

“Conversely, we continue to view an acquisition of Monster by Coca-Cola as making the most sense given meaningful cost and sales synergies,” they said.

As for the stock, Stifel analysts said the deal rumors are likely to “place a floor under” Monster shares ahead of its earnings on Feb.24 as investors focus more on the strategic value of the business longer term.

Another plausible option for the deal would see Monster Beverage make a full acquisition of Constellation, RBC Capital Markets analysts said, while Monster could also acquire its rival but then sell Constellation’s wine and spirits business for a high-teens Ebitda multiple.

“We believe Monster could be less interested in Constellation’s wine & spirits business vs. the beer business in a hypothetical acquisition, given potentially lower synergies in wine and a lower top line growth profile of the business,” they said.

Monster Beverage and Constellation Brands did not immediately respond to a request for comment.

Write to Callum Keown at [email protected]