(Updates with CEO quotes)
By Anjali Athavaley
NEW YORK, Aug 14 (Reuters) - Coca-Cola Co said Thursday it is making a cash payment of $2.15 billion for a 16.7 percent stake in Monster Beverage Corp as the world's largest soda maker seeks to expand into faster-growing categories such as energy drinks.
Under the agreement, Coke will have two directors on Monster's board. Coke will transfer ownership of its worldwide energy business including brands like Full Throttle and Burn, to Monster. Monster will transfer its non-energy business, which includes Hansen's Natural Sodas and Peace Tea, to Coke. Coke will become Monster's preferred distribution partner globally, while Monster brands will be the only energy drinks distributed by Coke.
For Coke, the transaction represents an opportunity to increase its footprint in energy drinks, a $27 billion market globally, according to Euromonitor International. It comes at a time when people are drinking less soda in developed markets. Coke said last month that its quarterly revenue in North America, its biggest market, was flat, partly driven by a decline in diet Coke sales.
In turn, Monster will gain access to Coke's extensive global distribution system. The companies have a distribution agreement in the U.S. and Canada and will amend it to expand into additional territories. On a conference call with media, Rodney Sacks, chief executive officer of Monster, said that the company would also convert distribution agreements it has with Anheuser-Busch InBev in the U.S. to Coke.
"We believe it will be a win-win strategy" Sacks said.
A person familiar with the transaction said that the deal enables Monster to enter markets where it doesn't have a presence, like China and Russia, and increase its footprint in places where the company thinks it can gain share, like Brazil.
Coca-Cola shares rose 1.2 percent in after-hours trading, while Monster surged 22 percent.
Coke's Chief Executive Officer Muhtar Kent said the company has the option to increase its stake to 25 percent and cannot exceed that amount in the next four years. Coke is under no obligation to make additional investments.
The transaction is expected to close late in 2014 or early in 2015.
The deal comes two years after Coke took the unusual step of shooting down a report by the Wall Street Journal that said it was in talks to buy Monster. Coke and Monster had discussed a possible deal as recently as 2011, sources familiar with the matter told Reuters at the time.
On the call, both companies downplayed the risk that energy drinks will be more strictly regulated. Monster is facing lawsuits over its advertising practices and injuries allegedly caused by its flagship energy drink.
Barclays served as financial adviser and Jones Day served as legal adviser to Monster. Skadden, Arps, Slate, Meagher & Flom LLP advised Coke.
Additional reporting by Jessica Dye; Editing by Jonathan Oatis, Andrew Hay and Bernard Orr