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Monster’s American Fruits & Flavors Acquisition: Key Benefits

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Proposed acquisition

In a 4Q15 conference call on February 25, Monster Beverage’s (MNST) chair and chief executive officer, Rodney Cyril Sacks, discussed a proposed acquisition of the California-based American Fruits & Flavors. Monster had announced this acquisition on February 23. American Fruits & Flavors is Monster Beverage’s principal supplier of concentrated flavors for the company’s Monster Energy drink line. Monster Beverage’s purchases from American Fruits & Flavors represent ~87% of its sales. The two companies have been working closely since the mid-1990s in developing new products and taste profiles.

Monster Beverage is acquiring American Fruits & Flavors for a cash payment of $690 million. The company expects to complete this acquisition by the end of the first quarter of 2016.

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Rationale behind the acquisition

Through this acquisition, Monster Beverage will own the vast majority of the proprietary flavors used in Monster Energy drinks. These include the flavors used in the company’s original green Monster Energy drink, Lo-Carb Monster Energy, and Monster Energy Absolutely Zero as well as the majority of the flavors in the Java Monster and Ultra lines.

In 2015, American Fruits & Flavors generated net revenue of about $168 million and adjusted operating income of $87 million. Monster Beverage expects the acquisition of American Fruits & Flavors to be immediately accretive to the company as of the transaction’s closing.

In the 4Q15 conference call, Monster’s CEO claimed that this acquisition aligns it with the company’s principal flavor supplier and will help Monster expand and secure most of its flavors economically. Monster Beverage’s sales growth rate has been higher than other nonalcoholic beverage companies. In fiscal 2015, Monster Beverage delivered sales growth of 10.5%. In fiscal 2015, sales of Coca-Cola (KO) and PepsiCo (PEP) fell 3.7% and 5.4%, respectively. Sales of Dr Pepper Snapple (DPS) rose 2.6% in fiscal 2015. Strong demand for energy drinks compared to carbonated soft drinks is driving Monster’s sales growth. The iShares Russell 1000 ETF (IWB) has 0.1% exposure to Monster Beverage.

We’ll look at the company’s stock price movement in the next part of this series.

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