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THE MERGERS AND ACQUISATIONS PITCH BOOK
PROPOSED ACQUISITION OF
DR PEPPER SNAPPLE®
BY MONSTER BEVERAGE CORPORATION®
By Kaiwei Zhang, Jiani Wen, Lihua Wang and Shuohua Xu
Led by Zi Wang
5, Dec 2015
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Contents
TERM SHEET............................................................................................................................................................................................................................................................... 4
DEAL RATIONALE....................................................................................................................................................................................................................................................... 5
BUSINESS DESCRIPTION—KEY BRANDS.................................................................................................................................................................................................................... 6
INDUSTRY OVERVIEW— CLASSIFICATION OF BEVERAGE INDUSTRY ...................................................................................................................................................................... 7
INDUSTRY OVERVIEW— SOFT DRINKS MARKET SIZE IN UNITED STATES (IN MILLIONS)....................................................................................................................................... 8
INDUSTRY OVERVIEW— PER CAPITAL CONSUMPTION OF SOFT DRINKS IN US FROM 2009-2014 (IN GALLONS)................................................................................................ 9
INDUSTRY OVERVIEW— SOFT DRINKS MARKET SHARE........................................................................................................................................................................................ 10
INDUSTRY OVERVIEW— SOFT DRINKS GEOGRAPHIC MARKET SHARE................................................................................................................................................................. 11
INDUSTRY OVERVIEW—DOWNTREND OF THE MARKET ....................................................................................................................................................................................... 12
ADVANTAGES OF DPS OVER OTHER SELLERS......................................................................................................................................................................................................... 13
IMPORTANT VALUATION ASSUMPTIONS............................................................................................................................................................................................................... 14
VALUATION SUMMARY: STAND-ALONE VALUES (IN DOLLARS PER SHARE)......................................................................................................................................................... 15
SENSITIVITY ANALYSIS—DCF................................................................................................................................................................................................................................... 16
SENSITIVITY ANALYSIS—RESIDUAL INCOME.......................................................................................................................................................................................................... 17
SYNERGY ANALYSIS ................................................................................................................................................................................................................................................. 18
PREMIUM ANALYSIS................................................................................................................................................................................................................................................ 19
NPV ANALYSIS FOR THE ACQUIRER AND THE BUYER ............................................................................................................................................................................................ 20
TRANSACTION PAYMENT METHOD........................................................................................................................................................................................................................ 21
RISKS ........................................................................................................................................................................................................................................................................ 22
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OTHER ASSUMPTIONS SUMMARY ......................................................................................................................................................................................................................... 23
NOTES ...................................................................................................................................................................................................................................................................... 24
EXHIBITS................................................................................................................................................................................................................................................................... 25
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TERM SHEET
Purchase Information
Total Deal Size $20,210.41 million
Implied Price per share $106.99
Exchange Ratio N/A (cash deal)
Resulting Monster ownership of Dr Pepper 100%
Accounting Issue
Consideration 100% of stock
Numbers of Shares to be issued 0%(cash deal)
Legal Issue and process requirements
Antitrust issue Approved by government
Closing date 1, Jan 2017[1]
Shareholders vote Both companies’ shareholders must approve this deal.
Other Issues
Organizational Structure Change Dr Pepper Snapple Group becomes a wholly-owned subsidiary of Monster Beverage
Corporation.
Executives Timothy T. Yates, CEO ; Mark Stoever, CFO[2]
Board Seats All board members remain same. Jim Baldwin and Derry Hobson will join new company and
enter the board of directors.[3]
Headquarters Corona, CA, USA
Name Monster Beverage Corporation
Reduction in Workforce All management in Dr Pepper Snapple Group will leave the company except for Jim Baldwin and
Derry Hobson. Overlapping non-management personnel will leave Dr Pepper Snapple Group.
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DEAL RATIONALE
By acquiring Dr Pepper Snapple Group, Monster1
will mainly be able to
Increase revenues and reduce SG&A by consolidating distribution channels
Reduce SG&A by cutting down numbers of management and some workers
Result in lower cost of capital by becoming a larger scale of company (financial synergy)
1
Dr Pepper Snapple Group® and Monster Beverage Corporation® will be abbreviated to “DPS” and “MNST” in our following statements respectively.
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BUSINESS DESCRIPTION—KEY BRANDS
BUSINESS DESCRIPTION—HISTORY
C
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INDUSTRY OVERVIEW— CLASSIFICATION OF BEVERAGE INDUSTRY
We majorly focus on the CDS and Sports Drinks today.2
2
Source: Beverage Marketing Corporation
U.S. Liquid Refreshment – Volume Growth
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INDUSTRY OVERVIEW— SOFT DRINKS MARKET SIZE IN UNITED STATES (IN MILLIONS)
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INDUSTRY OVERVIEW— PER CAPITAL CONSUMPTION OF SOFT DRINKS IN US FROM 2009-2014 (IN
GALLONS)
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INDUSTRY OVERVIEW— SOFT DRINKS GEOGRAPHIC MARKET SHARE
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INDUSTRY OVERVIEW—DOWNTREND OF THE MARKET
1. PepsiCo’s volume declined last year while Coca Cola posted the modest growth last year.
2. DPS post flat carbonated soft drink volume last year.
3. MNST reported a 7% increase in volume, followed by Red Bull, which notched a 5.6% increase.
Carbonated Soft Drinks – Volumes (2014)
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ADVANTAGES OF DPS OVER OTHER SELLERS
3
By Free cash flow to firm(FCFF) from 2010-2015
4
See EXHIBIT 1 for Beneish M-Score calculation detail
5
See EXHIBIT 2 for comparison of stock price vs. market
Abundant Free Cash Flow3
Mature Company And High-Quality
Management[4]4
Outperformance Of Market5
Consolidation Of Distribution Channels Economics Of Scale
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IMPORTANT VALUATION ASSUMPTIONS6
6
For other assumptions please see “OTHER ASSUMPTIONS SUMMARY”. All in millions, except for percentages and date.
7
Adjusting beta by converting to 1.
8
Scenario analysis is conducted in valuation part. See EXHIBIT-VALUATION for more details.
Risk-free Rate 0.62%
Market Risk Premium 13.50%
Beta (Adjusted)7
0.55
Cost of Equity 8.08%
Terminal Growth(Base Case)8
2.00%
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VALUATION SUMMARY: STAND-ALONE VALUES (IN DOLLARS PER SHARE)9
9
See EXHIBIT 3-7 VALUATION for details.
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SENSITIVITY ANALYSIS—DCF
GrowthRateCostofEquity
Change of NPV Change in Price
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SYNERGY ANALYSIS10
Quality Quantity
10
See EXHIBIT 8 for more details
Greater pricing power
Established distribution network
Brand name recognition
Economics of scale
Higher debt capacity
Diversification
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PREMIUM ANALYSIS11
Average premium of beverage industry transactions in recent 10 years is 34.7%
15.77%12
premium above DPS closing price on 4, Dec 2015 is offered
This premium is deemed acceptable, compared with industry average because
o Lower premium is a price advantage
o DPS is hard to find a strategic buyer due to its size
o DPS’s main business is in mature and declining industry
11
See EXHIBIT 9 for details. Note that in 2008 where there was a financial crisis, any transaction data that in that year and subsequent 2009 was not considered in calculating average
premium.
12
Based on current market price of $92.42.
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NPV ANALYSIS FOR THE ACQUIRER AND THE BUYER
This deal has economics because from NPV standpoint, the seller and buyer both have positive gain.
Pt(Price paid for target) 20.2B
-VT (stand-alone value) 13.4B
=Gain to seller 6.8B
Synergy 6.8B
- Takeover Premium 4.0B
=Gain to buyer 2.8B
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TRANSACTION PAYMENT METHOD
Cash instead of stock will be used to pay for the transaction because
Board of directors of DPS are about to retire13
, even though current stock price of Monster is underestimated14
.
Cash payment helps lock up the target’s gain and provide liquidity to DPS shareholders.
13
See EXHIBIT 10 for more details of their bibliography of DPS BOD team
14
According to comparison of stand-alone value and its current market price as of 4, Dec $156.70, while 1 year Median Target price is $165.00. Data sources is Capital IQ
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RISKS
This deal is exposed to some risks.
Will expected synergies be fully materialized?
Will cutting down overlapping personnel cause social activity that brings harmful reputations to the new company?
Will this deal bring subsequent competitive actions, such as a new merge of main competitors?
Will this deal correctly and fully be absorbed by market in time?
Will the buyer, MNST, accept our assumptions and conditions of the deal?
Will shareholders of DPS accept our assumptions and conditions of the deal? 15
Will complete cash payment be accessible in the deal?
15
See EXHIBIT 11 for ownership information.
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OTHER ASSUMPTIONS SUMMARY
All valuation methods forecast next five years and apply a terminal value at the end of 2019, the last forecast year. In fact, DPS
will be confronted with various factors, which influence company’s operation that would vary from year to year, including years
beyond 2019.
The sources of financial data provided in this book are Capital IQ, Bloomberg and company’s annual reports. They themselves
could be biased due to accounting manipulations (deliberate dishonesty) and other reasons (incompetence).
The management compensation package in this deal is ignored, which overestimates buyer’s NPV.
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NOTES
[1] As of today on 5, Dec 2015. We strongly believe that this deal needs at least one year to digest since announcement. Most of deals
failed since management are usually good deal maker but not good managers. People who used to work in different companies
separately now need to work together and need time to adapt to each other. Also, new distribution channels cost time to be
consolidated and could be very time-consuming.
[2] Executives of MNST will remain in the new company.
[3] Jim Baldwin and Derry Hobson will join new company and enter Board of Directors. Jim Baldwin is serving as Executive Vice
President and General Counsel in DPS and could provide expertise and experience in managing future Dr Pepper’s business. Derry
Hobson is serving Executive Vice President - Supply Chain in DPS and will play an important role in consolidation of distribution
channels in new company.
[4] Corporate Governance and M-score has proved that management and internal control of DPS is good. In terms of size, expertise and
background of BOD and management, DPS has an impressive management team. Also, Beneish M-Score of DPS as of 5, Dec is -2.59,
showing that its financial statements, including data used in this book, is less likely to be manipulated.
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EXHIBIT 7 RESIDUAL INCOME
Valuation Assumptions
Risk-free Rate 0.62%
Market Risk Premium 13.500%
Beta (Adjusted) 0.55
Cost of Equity 8.08%
Terminal Growth 2.00%
Capitalization Rate 6.08%
Valuation Date 12/2/2015
B/S Date 12/31/2014
Days Since 336
Portion of year elapsed 0.9205
Partial Year Adjustment 107.41%
Shares Outstanding 188.9
1 2 3 4 5
RIM 1 2015 2016 2017 2018 2019 Terminal
Beg. Book Value of Equity (BE) $3,028.60 $3,157.42 $3,275.49 $3,394.77 $3,506.44 $58,825.09
Cost of Equity - r 8.08% 8.08% 8.08% 8.08% 8.08% 8.08%
r x BE $244.71 $255.12 $264.66 $274.30 $283.32 $4,753.07
Net Income $608.70 $618.45 $626.76 $654.92 $725.25 $12,167.06
r x BE -$244.71 -$255.12 -$264.66 -$274.30 -$283.32 -$4,753.07
Residual Income (RI) $363.99 $363.33 $362.10 $380.62 $441.93 $7,413.99
Perpetuity with growth $148.28
Payoffs $363.99 $363.33 $362.10 $380.62 $590.21
PV Factor 1.0000 0.9252 0.8561 0.7921 0.7329
PV of Payoffs $363.99 $336.17 $309.98 $301.48 $432.54 $5,433.39
Calculation of Equity Value
Beg BE $3,028.60
PV RI $7,177.55
Equity Value - B/S Date $10,206.15
Partial Year Adjustment 107.4%
Equity Value at Valuation Date $10,962.92
Shares Outstanding 188.9
Value per Share $58.04
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EXHIBIT 8 SYNERGIES ANALYSIS
Assumptions
Shares Outstanding(million) 188.89
WACC 6.410%
WACC After Acquisition 5.352%
Year 2015 2016 2017 2018 2019 Terminal NPV After tax per share NPV After Acquisition
Revenue $107.29 $136.35 $974.05 $730.54 $223.53 $3,487.13 $4,596.12 $15.82 $4,751.24
COGS $71.86 $106.73 $141.60 $176.48 $211.35 $3,297.19 $3,180.20 $10.94 $3,299.78
SG&A $71.62 $91.72 $111.81 $131.91 $152.00 $2,371.29 $2,334.09 $8.03 $2,420.54
Capex $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Sum $250.77 $334.80 $1,227.46 $1,038.92 $586.88 $9,155.62
PV $250.77 $314.63 $1,084.03 $862.26 $457.74 $7,140.98 $10,110.40 $34.79 $10,471.56
Total Synergies $10,110 After Acquistion
After Tax Synergies $6,572 $6,806.51
Synergies per share $34.79 $36.03
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EXHIBIT 9 PREMIUM ANALYSIS16
Announce Date Target Name Acquirer Name Announced Premium (%)
2008/6/11 Anheuser-Busch Cos Inc Anheuser-Busch InBev SA/NV 27.6
2014/1/13 Beam Suntory Inc Suntory Holdings Ltd 25.08
2009/4/20 Pepsi Bottling Group Inc/The PepsiCo Inc 57.78
2010/12/2 Wimm-Bill-Dann Foods OJSC PepsiCo Inc 103.6
2009/4/20 PepsiAmericas Inc PepsiCo Inc 56.22
2006/1/3 Vincor International Inc Constellation Brands Inc 17.21
2010/12/2 Wimm-Bill-Dann Foods OJSC PepsiCo Inc 92.6
2012/7/23 Peet's Coffee & Tea Inc Joh A Benckiser SE 30.75
2008/5/20 China Water & Drinks Inc Nuverra Environmental Solutions Inc -33.4
2010/1/6 San Miguel Corp Top Frontier Holdings Inc 9.01
2005/10/27 Taittinger SA Starwood Capital Group LLC 0.45
2006/8/11 Sleeman Breweries Ltd Sapporo Holdings Ltd 23.66
2008/10/2 Lebedyansky JSC PepsiCo Inc,Pepsi Bottling Group Inc/The 1.98
2005/7/8 Cruzan International Inc V&S Vin & Sprit AB 10.28
2009/11/23 Diedrich Coffee Inc Keurig Green Mountain Inc 34.85
AVERAGE PREMIUM 34.74
16
Note that 34.74% is the average premium of selected transactions, which were not in 2008 or 2009. Those invalid transaction data are in rectangles
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EXHIBIT 10 BIBLIOGRAPHY OF DPS BOARD OF DIRECTORS
Name Age Position Year to join
Larry D. Young 60 Director, President and CEO 2007
Wayne R. Sanders 67 Chairman of Board and Lead Independent Director 2008
Pamela H. Patsley 58 Independent Director 2008
Joyce M. Roche 68 Independent Director 2011
David E. Alexander 61 Independent Director 2011
Dunia A. Shive 54 Independent Director 2014
Antonio Carrillo 48 Independent Director 2015
Ronald G Rogers 66 Independent Director 2008
M. Anne Szostak 64 Independent Director 2008
Ave. Age 60.67
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EXHIBIT 11 OWNERSHIP INFORMATION AND THEIR SHARE IN PERCENTAGE
Top Institutional Holders
Holder Shares % Out Value* Reported
Vanguard Group, Inc. (The) 16,874,198 8.93 1,333,905,402 Sep 30, 2015
Cedar Rock Capital Limited 12,143,497 6.43 959,943,474 Sep 30, 2015
JP Morgan Chase & Company 8,722,884 4.62 689,544,006 Sep 30, 2015
State Street Corporation 8,307,316 4.4 656,693,354 Sep 30, 2015
BlackRock Institutional Trust Company, N.A. 6,230,737 3.3 492,539,778 Sep 30, 2015
Fundsmith LLP 3,553,749 1.88 280,923,869 Sep 30, 2015
AllianceBernstein, L.P. 3,202,520 1.7 253,159,215 Sep 30, 2015
Ameriprise Financial, Inc. 3,166,622 1.68 250,321,478 Sep 30, 2015
BlackRock Fund Advisors 3,133,342 1.66 247,690,694 Sep 30, 2015
JANUS CAPITAL MANAGEMENT, LLC 3,081,298 1.63 243,576,616 Sep 30, 2015
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EXHIBIT 11 OWNERSHIP INFORMATION AND THEIR SHARE IN PERCENTAGE (CONTINUED)
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OTHER VALUATION ASSUMPTIONS
B/S Date 2014/12/31
Days Since 336
Portion of year elapsed 0.9205
Shares Outstanding(2015) 188.9 Millions
Beverage Concentrates(2015-2019) 2%,1.75%,1.5%,1.25%,1%
Packaged Beverages(2015-2019) 2%,2%,2%,1%,1%
Latin America Beverages(2015-2019) 5%,5%,4%,4%,3%
Cost of Goods Sold(2015-2019) 42%,42%,42%,41.5%.40%
SG&A(2015-2019) 40%,40%,40%,40%,40%
Depreciation & Amort.(2015-2019) 5.41%,5.41%,5.41%,5.41%,5.41%
%Tax Rate(2015-2019) 35%,35%,35%,35%,35%
Capex(2015-2019) 200,200,200,200,200
Weighted Avg. Basic Shares Out.(2015-2019) 188.89,179.74,172.36,164.98,157.6
Payout Ratio %(2015-2019) 43.36%,43.36%,43.36%,43.36%,43.36%
Valuation Date 12/06/2015
Capitalization Rate 6.08%
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REFERENCE
1. "Dr Pepper Snapple Group Inc (NYSE:DPS) Beneish M-Score." GORUFOCUS. GORUFOCUS, 17 Aug. 2014. Web. 5 Dec. 2015.
<http://www.gurufocus.com/term/mscore/NYSE:DPS/Beneish+M-Score/Dr Pepper Snapple Group Inc>.