BANGALORE Hansen Natural Corp HANS.O reached a distribution deal with Coca-Cola Co (KO.N) for its Monster energy drink, but the company's shares fell as much as 16 percent on worries of near-term disruptions in U.S. distribution and fears that a European expansion was ill-timed.
"We believe there is a substantial opportunity across the pond, although we question how lucrative the near-term potential is in the midst of a European economic crisis and, in particular, a weakening UK consumer," Lazard Capital Markets analyst Jacklyn Rider wrote in a note to clients.
Hansen shares were down $4.45 at $27.51, while those of Coca-Cola fell $3.66 at $48.91 in late afternoon trade on Monday, as U.S. markets tumbled on fears the widening fallout from the credit crisis would drag the economy into a recession.
Rider said, "The deal will displace select U.S. distributors and Pepsi in Canada for ones within the Coca-Cola network of bottlers; in the short term, this could prove disruptive."
The agreement with Coca-Cola and its largest bottler to distribute Monster energy drinks in parts of the United States, in Canada and in six Western European countries comes after industry publication Beverage Digest reported on Friday that the companies were close to a deal.
On Friday, Hansen shares jumped more than 11 percent.
In a note dated October 3, Goldman Sachs analyst Judy Hong said while the report did not signal Coca-Cola intended to buy Hansen, it could indicate the company was taking a closer look.
Monday's announcement did not mention Coca-Cola taking an equity stake in the company as some had speculated in the run up to the deal.
Hong said, "The strength of Coca-Cola's bottler network is good news for Monster's global prospects."
Western Europe and Latin America are particularly attractive energy-drink markets, and capturing a 1 percent share could boost Monster's sales 2 percent to 3 percent, Hong said, adding the success level is difficult to gauge given rival Red Bull's dominant share.
Lazard's Rider said she expects Hansen shares to be range-bound given a lack of sales visibility in an increasingly difficult consumer environment. She has a "hold" rating on the stock.
Hansen said the deal with Coca-Cola and bottler Coca-Cola Enterprises Inc (CCE.N) will not affect its agreement with Anheuser-Busch Cos Inc (BUD.N), which includes distribution of Monster in bars across the United States.
Hansen's agreement with Coca-Cola and its bottler begins in November in the United States, Britain, France, Belgium, the Netherlands, Luxembourg and Monaco, and will take effect in early 2009 in Canada.
Hansen said it also has the right to negotiate distribution agreements with other Coca-Cola bottlers to service the areas not covered by Coca-Cola Enterprises.
The company said it would move some existing distribution arrangements to new distributors, including Coca-Cola bottlers and Anheuser-Busch distributors, and pay a termination payment to distributors that will be dropped as part of that move.
Hansen estimated a pretax expense of $110 million to $130 million related to the termination payments and to recognizing previous payments from distributors, but said the amount could be higher or lower.
The company said payments from its new distributors would cover a significant portion of the costs of terminating deals with previous distributors.
Lazard's Rider said the termination fees will also be substantially more than the $28 million in fees related to Hansen switching over to the Anheuser-Busch network in 2006-07.
Smaller Coke rival Dr Pepper Snapple Group (DPS.N) said it will record a gain related to the contract termination with Hansen when terms are finalized.
In North America, the pact with Coca-Cola includes all Monster Energy beverages including Monster Energy and Java Monster, as well as the Lost Energy brand. In Western Europe, the agreement includes the distribution of Monster Energy.
(Reporting by Jessica Wohl in Chicago, Dilipp S. Nag and Vikram Subhedar in Bangalore; editing by Dave Zimmerman, Vinu Pilakkott)