Outsize rival hits Monster shares

Monster Beverage’s shares sank 14% on Thursday after the company said its top shareholder, Coca-Cola, is developing two energy drinks that could compete with its brand in the coming months.

Monster, whose black-andgreen cans are a common sight in the hands of skateboarders, motorcyclists and Formula 1 drivers, is in arbitration with Coke, the company said on Wednesday. Coke confirmed that it is developing two energy drinks and that it has filed for arbitration with Monster.

Coke’s new products may violate an agreement between the companies that restricts Coca-Cola from making rival energy drinks, Monster Beverage CEO Rodney Sacks said.

“We value our relationship with Monster. As in any commercial relationship, we will abide by our contractual obligations,” Coca-Cola said.

Coke also said “Coca-Cola Energy” plans to have caffeine from naturally derived sources and guarana extract. “It would be developed as a preferred option for people who want these types of ingredients in an energy drink.”

MAJOR RISK

Any competition with the world’s biggest beverage company is a major risk for Monster, Wall Street analysts said after Monster revealed Coke’s plans during a conference call with analysts after reporting thirdquarter results on Wednesday.

“This reflects the outsize bargaining power Coca-Cola has over Monster,” Morningstar analyst Sofia Vora said in a report. “Monster’s ability to secure shelf space and distribution is contingent on its relationships within Coca-Cola’s vast bottling network.”

Coke’s possible new energy drinks would raise uncertainty around Monster’s business, Wells Fargo analyst Bonnie Herzog said. Any competition could also mean that Coke which has a history of building ownership stakes in smaller companies before eventually buying them out is unlikely to acquire the rest of Monster, she added.

Coke, which has a distribution agreement with Monster in markets including India, has been looking to diversify into health, sports drinks and even coffee, as customers continue to ditch its sugary fizzy drinks.

Coke indicated that it had pushed the proposed launch of its energy drinks until April, Sacks said.

Monster shares were down 10% at $50.19 in trading before the opening bell on Thursday and clawed back more of those losses to trade down 6% by midmorning in New York.

The company declined to comment further on the impact on its business from any competition with Coca-Cola, but said its current ties with Coke, which owns 19% of Monster, would not be materially affected.