The maker of Canada Dry and Dr Pepper sodas said Tuesday it will spend $1.7 billion in cash to acquire the entire portfolio of Bai Brands, which mostly makes flavored still water filled with antioxidants, an increasingly important niche inside of the broader growing bottled water market. Not only will Bai Brands give Dr Pepper Snapple Group greater access to all things flavored still water, but it will allow it to capture growth from the brand's newer ventures such as tea and flavored sparkling beverages.
Such a deal for Bai Brands isn't a shocker.
Dr Pepper Snapple Group already distributes the company's drinks under an agreement inked in 2013. The growing distribution channels for Bai Brands has helped to pump up sales in Dr Pepper Snapple's non-carbonated beverage segment.
"We like to partner with brands that are in the nascent stage, and see the growth of the business," Dr Pepper Snapple Group CEO Larry Young said on a conference call.
The relationship between the two companies closely resembles the one between Coca-Cola and energy drink maker Monster Beverage.
Coke took a 16.7% stake in Monster back in late 2014 and began to distribute Monster's various energy drinks through its vast bottling network. The deal has been seen as a win for both parties.
From a Coke perspective, it has been able to run a portfolio of hot-selling carbonated products through its vast distribution network. Bottlers love that. Moreover, the company was basically able to shut out others such as PepsiCo (PEP) from swooping in and buying all of Monster. Not to mention that the value of Coke's stake in Monster has soared -- Monster's stock has surged about 95% from around the time rumors of Coke's stake swirled in early August 2014.
From a Monster perspective, it has likely learned how a real carbonated beverage operation should run, which has probably freed up time for management to focus more on product innovation and marketing.
"Well, we made an initial investment in a partnership and we are very happy with it. The Monster portfolio has been expanded internationally, and I think it's a very strong story and we are both doing very well out of it," Coke's Chief Operating Officer James Quincey told TheStreet in an interview earlier this year.
Although a deal for Monster would be very expensive for Coke given the run-up in its stock price, there are several reasons for this transaction to get done.
If Coca-Cola's deals team needs some further inspiration it may also want to check the news headlines on Pepsi. On Tuesday, the beverage and snack giant reportedly plunked down $200 million to acquire upstart kombucha drink maker KeVita.
Monster's new "super soda" called Mutant
Monster's business profile is very favorable.
The company continues to notch solid sales growth in the very competitive beverage space. Net sales in the company's Monster Energy segment, its largest, rose 3.4% to $710.1 million in the third quarter. For the nine months ended Sept. 30, the segment sales increased 7.3% to $2.1 billion. Meanwhile, the segment's operating margin so far this year has improved to an impressive 42.12% from 30.88% a year ago.
So in other words, Monster isn't growing its sales this strongly by giving products away.
Furthermore, the company is seeing strong double-digit sales growth with rapidly expanding margins in international markets.
How Monster is pulling these feats off boils down to consistent product innovation, which is essential in the beverage industry. From new energy shakes to the recent launch of a carbonated product called Mutant (taking aim at Sprite and 7 Up), Monster is out-innovating Red Bull and most others in the category.
The health of energy drinks are out of the limelight for now
Industry backdrop remains healthy.
Somewhat astonishingly energy drinks have stayed out of the fiery debate this year on sugar taxes. In an odd way, energy drinks have hit a near-term sweet spot of being seen as not as unhealthy as a can of soda (though that's certainly debatable given the caffeine counts and other chemicals). And this shows in the industry sales data.
According to Nielsen, for the four weeks ended Nov. 5 energy drink sales in the convenience and gas channel, including energy shots, increased 6.7% year over year. Sales of Monster products increased 8.9% from the prior year, while PepsiCo's energy-like drink Mountain Dew Kickstart saw sales pop 24.1%. Rockstar's sales rose 1.5%.
Sales of carbonated soft drinks such as soda only increased 0.4% during the same span, said Nielsen.
Monster takes its show on the road
Monster sitting on a potential emerging-market payday
The company is likely sitting on two catalysts that could unlock considerable sales over the next few years. First is China, where Monster launched its namesake energy drink this past fall in Beijing, Shanghai and the Hunan province. Execs anticipate launches in Guangzhou, Shenzhen and other markets to happen in the fourth quarter. A broader roll-out in China is expected in 2017.
The second opportunity looming for Monster in India. Although the company is still waiting for government approval to launch in the country, it expects it to come through sometime in 2017.