The rumored interest in a deal between Constellation Brands and energy drinks maker Monster has led to Wall Street analysts hypothesizing scenarios in which the two companies could potentially come together.
Bloomberg reported that the two companies were in talks, but the structure of a potential deal is unknown.
The latest analyst to run through the hypothetical tie-up scenarios comes from RBC Capital Markets’ Nik Modi. Here’s how Modi games out the potential pathways to a deal.
A Merger of Equals
The most likely scenario in which a deal gets done is “a merger of equals,” Modi wrote.
Constellation Brands ($44 billion) and Monster ($47 billion) boast similar market capitalizations, and the combined entity “would create a total beverage company with over $14 billion in sales and over $5 billion in EBITDA,” Modi wrote.
In a merger of equals scenario, Constellation’s management team would likely lead the combined entity, Modi wrote. However, Monster’s shareholders would own about 51% of the combined entity given the company’s “higher multiple and net cash position,” while Constellation shareholders would own 49%.
Monster Buys Constellation
Another “plausible” scenario is Monster acquiring Constellation Brands given the energy drink maker’s “strong net cash balance sheet position” and potential earnings per share accretion, Modi wrote. However, this scenario loses steam given the ages of Monster’s co-CEOs Rodney Sacks (71) and Hilton Schlosberg (68), which Modi wrote “could reduce the appetite to go through a large scale acquisition.”
According to Modi, this scenario could lead to high-single-digit to low-double-digit percentage earnings per share accretion, under the assumption of a 20% takeout premium, Monster funding the deal with $2 billion in cash/cash equivalents and the rest with 40%/60% debt/equity issuance, cost of debt conservatively in the 5.5% range, and synergies of 4-5% of target sales.
Another pathway to Monster acquiring Constellation would see the non-alc beverage company selling off Constellation’s wine and spirits business. RBC believes that Monster has less interest in Constellation’s wine and spirits business compared to beer due to “potentially lower synergies in wine and a lower topline growth profile of the business.” If this deal went through, it could yield high-single-digit percentage earnings per share accretion for Monster.
Constellation Buys Monster
The “least likely scenario,” according to Modi, would be a Constellation Brands takeover of Monster. Why? Due to the potential earnings per share dilution and the company’s 3.3x net debt leverage, as well as CEO “Bill Newlands’ philosophy around eschewing capital allocation for big deals.”
“In this scenario, we estimate a 20% dilution assuming: (a) a 20% takeout premium, (b) STZ funding the deal with 40% debt and the remaining 60% with equity issuance, (c) cost of debt in the 5.5% range, and (d) synergies of 4-5% of target sales,” Modi wrote.
A Partnership
In the event that a deal couldn’t be struck, talks could lead to a partnership in which the companies manufacture and distribute alcoholic beverages, similar to Molson Coors and Coca-Cola with Topo Chico Hard Seltzer or Boston Beer’s tie-up with PepsiCo to produce Hard MTN Dew.
This could allow both companies to “expand their occasion and category exposure” as the lines between non-alc and alc beverages continue to blur.