Coca-Cola (KO) and Monster (MNST) join forces as soft drink sales lag

The world's largest soda company is creating buzz in the energy drink business. 

The Atlanta based Coca-Cola Co. (KO) announced Thursday that it will become a minority stakeholder in Monster Energy Corp (MNST). In the blockbuster deal, Coke will pay $2.15 billion in cash for a 16.7 percent stake in the Corona, Calif.-based energy drink company. Per the terms of the deal, Coca-Cola will also have two members on Monster's board of directors. 

“The Coca-Cola Company continues to identify innovative approaches to partnerships that enable us to stay at the forefront of consumer trends in the beverage industry,” Muhtar Kent, chairman and CEO of The Coca-Cola Company, said in a press release.  “Our equity investment in Monster is a capital efficient way to bolster our participation in the fast-growing and attractive global energy drinks category.”

In the deal, Monster will give Coca-Cola its non-energy brands, including Hansen's Natural Sodas, Hubert's Lemonade, and Peace Deal. In return, Coca-Cola will give Monster ownership of energy drink brands NOS, Full Throttle, Burn, and Mother.

The deal also stipulated that Coca-Cola can increase its stake in Monster to 25 percent within the next four years through open market purchases. But, Coca-Cola cannot surpass the 25 percent mark without Monster's approval. 

“The transaction announced today represents a unique opportunity for Monster and its shareholders,” Rodney C. Sacks, chairman and CEO of Monster, said in a press release.  “We gain enhanced access to The Coca-Cola Company’s distribution system, the most powerful and extensive system in the world.  At the same time, we become The Coca-Cola Company’s exclusive energy play, with a robust portfolio led by our Monster Energy line and The Coca-Cola Company’s energy brands."

John Sicher, editor of industry publication Beverage Digest, told The Los Angeles Times that the move will help Coca-Cola move beyond the stagnant soda industry. 

"The carbonated soft drink business in the U.S. has been in decline for nine years — energy drinks are one of the few good growth areas," Mr. Sicher said. "This is a terrific deal for both of these companies."

Last year, soft drink sales declined 3 percent. In 1998, the average American drank 56 gallons of soda annually. Today, it's about 42 gallons, according to Beverage Digest.

Monster, on the other hand, has seen seen a lot of growth, along with energy drinks in general. The company's net sales grew 8.9 percent year over year and reported $687.2 million in revenue, according to the company's second-quarter earnings report. Energy drinks accounted for 93.1 percent of the company's growth in the last quarter.

“What Coke is doing is both carefully and dramatically beginning to use deals to enhance its growth,” Sicher told The New York Times. “It’s a smart and conservative way to branch out into these areas.

This isn't Coca-Cola's first deal of the year. In February, Coca-Cola paid $1.25 billion for a 10 percent stake in Keurig Green Mountain, a Vermont-based producer of K-Cups, which are used in Keurig coffee machines. In May, Coca-Cola upped its shares to 16 percent, becoming Green Mountain's largest shareholder. Keurig Green Mountain and Coca-Cola reportedly are working on a machine that will make homemade soft drinks.

What's more, the soda giant has made inroads into other drink sectors over the years. WIth established presences in juice (MinuteMaid) and bottled water (Dasani), Coke bought VitaminWater in 2007 and HonesTea in 2011.  

Monster and Coca-Cola's deal should be finalized in later 2014. But news of the deal gave a boost to both companies' stocks. Monster shares were up 30.62 percent by mid-morning Friday; Coca-Cola's stocks were up almost 2 percent before tapering off to about a 1.25 percent increase as of 11;45 a.m.. That's good news for Coke's shareholders, because the company's stocks are down 1.8 percent on the year.