After Keurig Buyout, What's Next for Beverage Stocks?

The recent buyout of coffee machine maker Keurig Green Mountain, Inc. GMCR has stirred the beverage sector and brought many stocks into the limelight.

On Monday, Keurig agreed to sell itself to an investor group led by a Luxembourg based private company, JAB Holding Company (‘JAB'), for $13.9 billion, pushing its share price up 72% on Friday. The deal, expected to close in the first quarter of 2016, seems to be quite attractive for Keurig, as it will offer significant cash value for its shareholders, who have seen the stock fall nearly 61% since the beginning of the year.

The deal also brought good fortunes for The Coca-Cola Company KO which owns around 17% stake in the specialty coffee retailer. Coca-Cola reportedly stands to make a profit of around $25.5 million from its investment in Keurig, if the merger gets through. Prior to JAB's buyout, this investment in Keurig was reportedly worth a loss of approximately $1 billion.

This coffee deal could also have an impact on the ongoing speculation on the merger of Mondelez International, Inc. MDLZ and PepsiCo, Inc. PEP. The rumour has been flowing since 2013 that activist investor Nelson Peltz is fast building stakes in PepsiCo and Mondelez, possibly in pursuit of a large $170 billion merger of the consumer giants. Mondelez is a coffee JV partner of JAB Holdings.

The Keurig deal also pulled up shares of SodaStream International SODA, the producer of a consumer do-it-yourself beverage carbonation system. Rumors of its takeover by PepsiCo or Starbucks Corp. SBUX have been doing the rounds ever since Coca-Cola bought a stake in Keurig Green Mountain back in February. Concerns over slowing revenue growth have added fuel to the rumors.

Coca-Cola also acquired approximately 16.7% equity stake in the energy drink maker Monster Beverage Corp. MNST in June to gain a share of the energy market.

We note that there's a lot of consolidation and expansion activity going on among the industry's largest beverage companies and now the M&A platform has become overcrowded. Besides coffee and soft beverages, the beer industry, especially craft beer, is an attractive space for growth-seeking brewers. We note that craft beers are gaining popularity among youngsters and their market shares have doubled over the last five years on increased demand.

This is evident from a recent series of acquisitions that took place within the space. Let's have a look at some of these.

On Nov 16, one of the leading international producer and marketer of beverage alcohol brands, Constellation Brands Inc. STZ agreed to acquire San Diego-based Ballast Point Brewing & Spirits for about $1 billion, in an endeavor to strengthen its position in the booming craft beer segment and to expand its footprint in the U.S. beer market.

Earlier in October, New York-based Charmer Sunbelt Group and Wirtz Beverage Group, Chicago, two family-run distributors of wine, spirits and beer, had announced that they will substantially combine all of their beverage alcohol operations.

In September, Anheuser-Busch InBev SA/NV BUD announced plans to buy Golden Road Brewing while Heineken NV HEINY purchased a 50% stake in Lagunitas Brewing Co. Also, Firestone Walker Brewing Co announced its intention to merge with Duvel Moortgat, earlier in 2015. Another company that is keen on expanding its craft beer portfolio is Boston Beer Co. Inc. SAM.

In July, Bacardi Ltd., Hamilton, Bermuda, expanded its portfolio of super-premium rums with the acquisition of Banks rum. Then in late-March, Bacardi Ltd. expanded its portfolio of super-premium spirits with the acquisition of Louisville-based Angel's Share Brands; its subsidiary, Louisville Distilling Co.; and its Angel's Envy brand. This deal marked the company's entry into the bourbon category of the North American whiskey sector.

Standing out, among all the recent consolidation and expansion activities in the spirits industry is the merger between Anheuser-Busch InBev and London-based SABMiller plc SBMRY, announced on Sep 16. This will create a brewing behemoth worth $276 billion. The transaction will drive increased growth for both the companies and expand their consumer base.

In fact, Anheuser-Busch InBev's prospective deal with SABMiller is expected to have a ripple effect on peer stocks and other consumer industries in the next few years, from soda makers and bottlers to snack manufacturers.

Per Reuters, if AB InBev succeeds in acquiring SABMiller, the resulting company would have the potential to eventually buy The Coca-Cola Co. or PepsiCo.

The AB InBev and SABMiller merger would also provide opportunity for global brewer Molson Coors Brewing Co. TAP to gain increased exposure to the U.S. market, as anti-trust regulators would most likely force SABMiller to dilute its 58% stake in MillerCoors (the joint venture formed between SABMiller and Molson Coors). According to the joint venture agreement, Molson Coors has right of first and final refusal to acquire SABMiller's holding.

Therefore, if the big beer merger gets regulatory approval, Molson Coors would acquire SABMiller plc's 58% stake in MillerCoors, as announced in November. (Read: Molson Coors Acquires SABMiller's 58% Stake in MillerCoors). The purchase of SABMiller's stake by Molson Coors will allow it to take strategic control over the highly attractive U.S. beer market, improve tax efficiency and further improve its global scale and agility.

As the beverage space evolves, it would therefore be interesting to see the continued consolidation among big brewers and former rivals.

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