Showing posts with label Coca-Cola. Show all posts
Showing posts with label Coca-Cola. Show all posts
Sunday, February 17, 2013
Weighing Down Heinz With Debt
Warren E. Buffett deployed his avuncular charm on Thursday when talking about Berkshire Hathaway’s proposed acquisition of H.J. Heinz. The food company’s chief executive, William R. Johnson, said the deal was a natural next step that wouldn’t lead to big upheavals any time soon.
But for all the reassurances, the deal will turn Heinz into a much riskier company. It will have to operate with a much larger amount of debt on its books, significantly reducing the margin of error for its new owners.
Berkshire will be one of those new owners, taking a 50 percent stake. The other half will belong to 3G Capital Management, a Brazilian-backed investment firm that has stakes in other food and beverage companies including Burger King.
Berkshire and 3G are taking Heinz private in a $23 billion cash deal, which means its shares will come off the stock market. The deal will mean Heinz will also be liable for the debt used to pay for the deal. After the deal, Heinz could have well over $10 billion of debt, compared with $5 billion now.
One of the effects of the deal is that Heinz’s credit rating will almost certainly be slashed into junk territory. Before the deal was announced, Moody’s Investors Service rated the company two notches above junk.
Defenders of debt-laden deals like this say that they can work with the right owners.
Mr. Buffett said on CNBC on Thursday that 3G would have operational responsibilities. He thinks highly of 3G, whose principal owner is a billionaire named Jorge Paulo Lemann. “I don’t think I’ve ever seen a better developed management group than the one Jorge Paulo Lemann has developed over the years in Brazil,” Mr. Buffett said. “He has been incredible.”
3G has a majority stake in Burger King, which it brought back onto the stock market last year after taking it private in 2010. It appears that 3G and Berkshire may want to use Heinz as a vehicle to make other acquisitions.
But that may turn into an uphill journey. Not only is there all the new debt to pay, Heinz is being bought at a high valuation, roughly 20 times its earnings. When companies are bought at a lofty multiple to earnings, it’s theoretically harder for the acquirers to achieve their investment return targets. To hit those targets, management may decide to cut costs, leading to job losses. Or, conversely, the company may spend a lot of money in new initiatives in an effort to increase revenue.
And there is an element to the deal that shows Mr. Buffett is well aware of its risks.
In addition to common equity, Berkshire is getting $8 billion of preferred shares. These will pay Berkshire a 9 percent return, according to a person familiar with the deal’s terms. That’s a hefty return from a company in a relatively stable industry. Berkshire got only slightly higher — 10 percent – on preferred shares in Goldman Sachs that it purchased at the height of the financial crisis.
More important, the preferred income gives Berkshire significant protection if the value of its common shares falls below expectations. “There aren’t many entities that could do this deal; Berkshire is making sure it’s getting paid for it,” said Meyer Shields, an analyst who covers Berkshire Hathaway for Stifel Nicolaus.
One mystery is why Mr. Buffett didn’t just buy common stock of Heinz on the open market. Berkshire often does that, and currently holds sizable stakes in companies as diverse as I.B.M. and Coca-Cola.
Perhaps he wanted to own more than a small minority stake, but purchasing the whole of Heinz may have been too big a deal, even for Berkshire Hathaway. Indeed, one day, 3G may decide to sell its stake to Berkshire, giving it full ownership. And in the meantime, Berkshire would have earned a solid return on its preferred shares and its common shares.
“‘Buy commodities, sell brands’ has long been a formula for business success,” Mr. Buffett wrote in a recent annual report. Heinz certainly fits that mold today. The big question is whether it still will once its balance sheet has been loaded up with debt.
Source: http://dealbook.nytimes.com/2013/02/14/weighing-down-heinz-with-debt/
Tuesday, May 1, 2012
Coke Explored Talks With Monster
Facing sluggish growth in its U.S. soft-drink business, Coca-Cola Co. KO +0.70% has explored a deal for energy-drink company Monster Beverage Corp., MNST +2.05% according to people familiar with the matter, a combination that would have been Coca-Cola's largest brand acquisition in its 126-year history.
Coca-Cola has been looking for "bolt-on" acquisitions, in the recent words of Coke Chairman and Chief Executive Muhtar Kent. But the company said Monday afternoon that "at this time," it is not in talks to buy Monster.
People familiar with the matter said Coca-Cola had been in talks to acquire Monster, but decided to walk away after a 20% jump in Monster Beverage's share price on Monday, which was a reaction to a Wall Street Journal report that the two parties were in discussions. Monster's market capitalization jumped to $13 billion, up $2 billion in Monday trading, although it later slid back to about $11 billion after Coke issued its denial. Coke's own shares held steady. And according to one person familiar with the matter, Coke on Monday heard from some angry investors who questioned the idea and the price.
Coke spokesman Kent Landers disputed the accounts that any talks ended Monday because of the stock jump or because of angry shareholders. He reiterated Coke isn't in discussions to acquire Monster.
Some people involved in the talks didn't learn about the collapse until Monday afternoon, according to people familiar with the matter.
Monster's valuation was already seen as an obstacle to Coca-Cola pursuing a deal. The stock price has about doubled in the past year, and Monster trades at roughly 30 times estimated 2012 earnings. After their wild ride, Monster shares closed Monday down 53 cents to $65.
Coca-Cola already has an agreement with Monster to distribute some of its drinks, and that could diminish the potential synergies from any deal—and thus Coke's willingness to pay a large premium.
Monster Beverage, which had sales of $1.7 billion last year, reached out to prospective buyers last year but interested parties, including Coca-Cola and PepsiCo Inc., PEP +0.71% decided against pursuing a deal because of the high price, people familiar with the matter said. In recent months, Monster again contacted potential buyers and Coca-Cola decided to take a serious look, conducting due diligence, people familiar with the matter said.
Monster declined to comment, citing a policy of not commenting on market speculation.
With sales in its core soft drink business mostly flat in the U.S., Coke has been aggressively expanding into newer drinks to boost sales. In 2007, Coke paid $4.2 billion to buy the maker of Vitaminwater drinks—its biggest brand takeover to date.
Both Coke and rival Pepsi want to improve their lineup of energy drinks—the fastest-growing beverage category in the U.S.—because their current energy drink brands lack a strong following. But an acquisition of Monster would be expensive and complicated.
Monster, which makes Monster Energy, Java Monster and other beverage brands, had a 34.8% volume share of the U.S. energy-drink market in 2011, followed by Austria's Red Bull, which had a 29.5% share, according to Beverage Digest.
The rapid rise of energy drinks comes as fewer Americans grab colas and traditional sodas. Even with the boost from energy drinks, carbonated soft drink volumes in the U.S. dropped about 1% last year to reach 15-year lows. Coke said its soda volumes rose 1% in North America in the first quarter.
Coke has been seeking to expand its portfolio of energy and "alternative" drinks for several years. Earlier this year, Coke acquired a majority stake in Zico, a coconut water brand, for an undisclosed amount. Coca-Cola also has its Full Throttle and Fuze NOS energy-drink brands in the U.S., but they haven't performed as well as the Red Bull and Monster brands.
Retail sales of energy drinks in the U.S. increased to an estimated $8.9 billion last year from $7.7 billion in 2010 and now represent more than a tenth of the country's $75 billion carbonated soft drink market, according to Beverage Digest, a trade publication and data service.
Monster reported fourth-quarter gross sales increased 28% to $467.3 million, compared with the same period last year. Fourth-quarter net income increased 31% to $64.5 million.
For all of 2011, the Corona, Calif., company said revenue rose 31%. Analysts expect revenue to rise 17% this year.
If it decides to buy the energy drinks company, Coca-Cola may sell some of its bottling assets to pay for the acquisition, said people familiar with the situation.
A Coke takeover of Monster would heighten pressure on PepsiCo, which has been losing beverage market share to Coke in recent years. Like Coke, PepsiCo has failed to keep pace with Monster or Red Bull in energy drinks.
PepsiCo widely distributes Rockstar in the U.S., in addition to its own energy drink brand AMP, which had an estimated 4.4% U.S. market share last year, Beverage Digest estimated. Closely held Rockstar is the No. 3 player in the U.S., with an estimated 18.7% share. Industry insiders also have speculated Rockstar is a potential takeover target.
Source: http://online.wsj.com/article/SB10001424052702303916904577375900742730404.html?mod=business_newsreel#project%3DMONSTERTAB%26articleTabs%3Darticle
Coca-Cola has been looking for "bolt-on" acquisitions, in the recent words of Coke Chairman and Chief Executive Muhtar Kent. But the company said Monday afternoon that "at this time," it is not in talks to buy Monster.
People familiar with the matter said Coca-Cola had been in talks to acquire Monster, but decided to walk away after a 20% jump in Monster Beverage's share price on Monday, which was a reaction to a Wall Street Journal report that the two parties were in discussions. Monster's market capitalization jumped to $13 billion, up $2 billion in Monday trading, although it later slid back to about $11 billion after Coke issued its denial. Coke's own shares held steady. And according to one person familiar with the matter, Coke on Monday heard from some angry investors who questioned the idea and the price.
Coke spokesman Kent Landers disputed the accounts that any talks ended Monday because of the stock jump or because of angry shareholders. He reiterated Coke isn't in discussions to acquire Monster.
Some people involved in the talks didn't learn about the collapse until Monday afternoon, according to people familiar with the matter.
Monster's valuation was already seen as an obstacle to Coca-Cola pursuing a deal. The stock price has about doubled in the past year, and Monster trades at roughly 30 times estimated 2012 earnings. After their wild ride, Monster shares closed Monday down 53 cents to $65.
Coca-Cola already has an agreement with Monster to distribute some of its drinks, and that could diminish the potential synergies from any deal—and thus Coke's willingness to pay a large premium.
Monster Beverage, which had sales of $1.7 billion last year, reached out to prospective buyers last year but interested parties, including Coca-Cola and PepsiCo Inc., PEP +0.71% decided against pursuing a deal because of the high price, people familiar with the matter said. In recent months, Monster again contacted potential buyers and Coca-Cola decided to take a serious look, conducting due diligence, people familiar with the matter said.
Monster declined to comment, citing a policy of not commenting on market speculation.
With sales in its core soft drink business mostly flat in the U.S., Coke has been aggressively expanding into newer drinks to boost sales. In 2007, Coke paid $4.2 billion to buy the maker of Vitaminwater drinks—its biggest brand takeover to date.
Both Coke and rival Pepsi want to improve their lineup of energy drinks—the fastest-growing beverage category in the U.S.—because their current energy drink brands lack a strong following. But an acquisition of Monster would be expensive and complicated.
Monster, which makes Monster Energy, Java Monster and other beverage brands, had a 34.8% volume share of the U.S. energy-drink market in 2011, followed by Austria's Red Bull, which had a 29.5% share, according to Beverage Digest.
The rapid rise of energy drinks comes as fewer Americans grab colas and traditional sodas. Even with the boost from energy drinks, carbonated soft drink volumes in the U.S. dropped about 1% last year to reach 15-year lows. Coke said its soda volumes rose 1% in North America in the first quarter.
Coke has been seeking to expand its portfolio of energy and "alternative" drinks for several years. Earlier this year, Coke acquired a majority stake in Zico, a coconut water brand, for an undisclosed amount. Coca-Cola also has its Full Throttle and Fuze NOS energy-drink brands in the U.S., but they haven't performed as well as the Red Bull and Monster brands.
Retail sales of energy drinks in the U.S. increased to an estimated $8.9 billion last year from $7.7 billion in 2010 and now represent more than a tenth of the country's $75 billion carbonated soft drink market, according to Beverage Digest, a trade publication and data service.
Monster reported fourth-quarter gross sales increased 28% to $467.3 million, compared with the same period last year. Fourth-quarter net income increased 31% to $64.5 million.
For all of 2011, the Corona, Calif., company said revenue rose 31%. Analysts expect revenue to rise 17% this year.
If it decides to buy the energy drinks company, Coca-Cola may sell some of its bottling assets to pay for the acquisition, said people familiar with the situation.
A Coke takeover of Monster would heighten pressure on PepsiCo, which has been losing beverage market share to Coke in recent years. Like Coke, PepsiCo has failed to keep pace with Monster or Red Bull in energy drinks.
PepsiCo widely distributes Rockstar in the U.S., in addition to its own energy drink brand AMP, which had an estimated 4.4% U.S. market share last year, Beverage Digest estimated. Closely held Rockstar is the No. 3 player in the U.S., with an estimated 18.7% share. Industry insiders also have speculated Rockstar is a potential takeover target.
Source: http://online.wsj.com/article/SB10001424052702303916904577375900742730404.html?mod=business_newsreel#project%3DMONSTERTAB%26articleTabs%3Darticle
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