As The Coca-Cola Company (NYSE:KO)’s acquisition of a minority stake of Monster Beverage Corp (NASDAQ:MNST) is generally praised by media pundits, the stock price of Monster dropped over five percent on Monday.
Hedge fund traders, some in whispers and some on the record, are calling into question Muhtar Kent’s high-priced gambit along with unusual option trading in calls in the stock just before the deal was announced.
Coca-Cola overpaid for Monster Beverage stake
Reaction from traders is that Coke significantly overpaid for a minority stake in the beverage company and as a result the highs of the year may have been put in the stock. For its part, Jefferies downgraded its rating on Monster from buy to hold and but raised its long term price target to $95 from $80. The stock price closed yesterday at $88.44.
While professional investors who spoke with ValueWalk were generally skeptical, pundits such as CNBC’s Jim Cramer praised The Coca-Cola Company (NYSE:KO)’s acquisition. Cramer had been firmly in the establishment camp rooting for Kent during what was described as an overly rich compensation plan was being awarded senior Coke management. Monday Cramer said on his show “Mad Money” that Monster Beverage Corp (NASDAQ:MNST)’s distribution network would dramatically improve Monster’s position and the company could now aggressively pursue European markets.
While this may be true, what wasn’t mentioned in Cramer’s analysis is that Coke may have given away a high profit business segment and replaced it with a low margin wholesaler agreement. This is on top of the fact that traders generally acknowledge that Coke overpaid for a company whose really eye-popping growth numbers may be behind it.
David Winters: Coke abandoned their organically developed energy drink business
“We think they paid a steep price in both cash and assets in order to get a minority stake in the company and a low margin distribution agreement with Monster,” said David Winters, founder of Wintergreen Advisors, who manages nearly $2.2 billion and was the man behind the campaign questioning The Coca-Cola Company (NYSE:KO)’s executive compensation plan. David Winters says Coke abandoned their organically developed energy drink business, which, while it was small, appears to generate high margins and was a steady grower.
”They traded their energy drink business, with high retail profit margins, for a distribution agreement with low wholesale profit margins,” David Winters said in an exclusive interview with ValueWalk. “Coke will need to push a lot of incremental Monster Beverage Corp (NASDAQ:MNST) volume through their international distribution channels in order to generate a decent return on the investment. The deal appears to be structured so that the majority of the economic upside accrues to Monsters shareholders, not Coke shareholders.”
The Monster energy deal comes as Kent was under intense pressure to inject growth into an company whose flagship products, carbonated beverages, is witnessing sagging popularity, particularly among younger consumers. “Muhtar and Coke missed the trend, again, in consumer tastes,” David Winters said. “As they did with Glaceau and Keurig Green Mountain Inc (NASDAQ:GMCR), they are now paying a big price to get in on the action. Muhtar seems to be attempting to distract investors with lots of drama and sparkle while delivering more poor results to Coke shareholders.”
Coca-Cola’s options action in the stock distracting investors
Distraction of investors might also be interesting relative to options action in the stock. On CNBC Najarian indicated that Coke management may be responsible for leaking information to traders. Najarian noted after Monster’s earnings announcements last
“Coke kept their formula a secret for 100 years, but they didn’t keep this (Monster deal) a secret,” Najarian said. “Somehow people knew and traded ahead of the deal,” as the options experienced large block trades at ten times the normal volume. Najarian later qualified his statement as speculation. Block trading, often a sign of professional investors or well-capitalized individual investors making what Najarian described as “Billionaire maker” trades.