The lines between alcoholic and non-alcoholic beverages continue to blur. Bloomberg broke the news Sunday evening that Constellation Brands and energy drink maker Monster Beverage Corp. are considering a deal.
Bloomberg, citing “people familiar with the matter,” reported that Monster has discussed a potential deal with its advisers, however “the exact structure of a potential tie-up couldn’t be immediately learned and it’s unclear whether discussions will lead to a full merger or asset deal.”
Constellation declined to comment on the report.
“We don’t respond to rumors or speculation,” a spokesperson told Brewbound.
A potential deal between Constellation and Monster would be a tectonic shift in the beverage industry at a much more rapid pace than expected. Monster ($47 billion) and Constellation ($44 billion) hold similar market values, and thus have the potential to create a combined entity worth nearly $100 billion.
On the Constellation side, a transaction would need the approval of the Sands family, which holds 60% of the combined voting power of Constellation’s Class A and Class B stock. Constellation’s portfolio includes popular Mexican imports Corona, Modelo and Pacifico; craft beer brands Funky Buddha and Four Corners; and spirits offerings Casa Noble Tequila, Svedka Vodka and High West Whiskey. Constellation also holds a nearly 40% stake in cannabis firm Canopy Growth, which could be enticing to Monster.
Meanwhile, Coca-Cola owns just under 20% of Monster, which a Bloomberg analyst said “may pose a sticking point” and prove complicated, given Monster’s exclusive distribution deal with Coke. However, there is overlap with Constellation and Monster in the Reyes distribution network.
Wall Street analysts were mixed in their reaction. Jefferies equity analyst Kevin Grundy called a proposed deal between the two companies “a big surprise to investors.”
“Potential deal would expedite ‘conversion’ theme in global beverages, though strategic fit, terms, and backing by Sands family remain question marks,” Grundy wrote.
“The U.S. beverage landscape has seen greater blurring of lines between alc./non-alc. occasions, which has broadened strategic considerations around partnerships, consolidation, and distribution assets,” Grundy wrote “Yet, the timeline for a potential merger of this magnitude was thought likely to be measured in years, and not weeks or months.”
Grundy laid out the case for, including “added scale, cost synergies, cross-pollination of best/practices/innovation/R&D and distribution synergies.”
Goldman Sachs analyst Bonnier Herzog also called the talks “unexpected,” with the combined company offering “very minimal synergies (not much by way of production or distribution).”
So why tie up? Herzog wrote that Monster has shown previous interest in the alcohol space, rumored to be in hard seltzers, although that interest has waned. The talks could also accelerate Coca-Cola’s ultimate decision on whether to acquire the remaining stake in Monster. Additionally, Constellation’s stake in cannabis firm Canopy Growth could provide Monster access to CBD and THC beverages, should the company have interest in launching products in that space. Finally, Monster could unlock opportunities for Constellation Brands in the beyond beer space, Herzog wrote
RCB equity analyst Nik Modi described the potential deal as “not entirely surprising given the convergence of beverage categories over the last few years and the blurring of the lines between alcoholic and non-alcoholic beverages.” He pointed to consumers’ category-agnostic shopping habits as a reason why the proposed deal would work.
“We believe consumers are increasingly shopping based on ‘beverage occasions’ and not ‘beverage categories,’” he wrote. “In this context, the combination would make sense, as it would combine STZ’s ‘enjoyment’ occasion offering with its beer brands (Corona, Modelo, Pacifico), its ‘relaxation’ occasion offering with its Canopy investment, and MNST’s ‘pick-me-up’ offering within energy drinks.”
To Modi, the combination would be more about forward-looking innovation than immediate cost saving. Although those savings would certainly be present, Modi said he doesn’t “see cost synergies as the potential value driver here.”
“We think the combination of the two companies would be nicely complementary and create a platform for future innovation in the beverage industry,” he wrote. “From a financial standpoint, we could see significant potential revenue synergies from expanding the Monster brands into alcoholic RTD beverages and potentially some of Constellation’s beer brands into non-alcoholic beverages, in addition to the sharing of know-how in the different categories and the combination of two strong innovation teams.”
Other combinations across alc and non-alc producers include Molson Coors’ and Coca-Cola’s joint venture to produce Topo Chico Hard Seltzer. Year-to-date through October 31 in limited markets, the brands’ off-premise sales have reached nearly $72 million, according to market research firm IRI. Molson Coors plans to take Topo Chico national in 2022, as well as expand its packaging lineup to include glass bottles similar to those of traditional, non-alc Topo Chico.
Earlier this year, Boston Beer Company announced two different joint ventures with non-beer makers — one with PepsiCo to produce HARD MTN DEW and one with spirits giant Beam Suntory to produce a variety of cross-branded, cross-category products, such as Truly Hard Seltzer-branded spirits and Sauza Tequila-branded margarita-style FMBs.
Those products’ routes to market will vary, as PepsiCo intends to distribute HARD MTN DEW to off-premise retailers through its newly created Blue Cloud distribution network, and Boston Beer will sell it in on-premise channels. For Beam collaboration products, Boston Beer will sell those that fit within the beer category and Beam will sell those that fall under spirits.