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Is HANS a Takeover Target? Analysis of Recent Rumors 2007-07-17 09:45:31
Submitted by: admin
One of the favorite targets of takeover rumors in the past year has been Hansen Natural Corporation (HANS). In June of 2006 we heard rumors that Adam Harkness said there was a strong possibility that Coca Cola (KO) would make a bid for HANS at a 50% premium.
Takeover rumors again began to circulate in September of 2006 when OPCO said that HANS would get bought out soon. In December rumors of a leveraged buyout circulated.
Since May of 2007 rumors have run rampant that Anheuser-Busch Companies Inc (BUD) or Pepsico Inc (PEP) are interested in buying out Hansen.
Hansen Natural Corporation (HANS $43.82)
With a market cap of just under $4B, Hansen's valuation has climbed substantially since September. Earnings have steadily grown over the last several years, and estimates are that they will keep growing in revenues. HANS currently has a P/E ratio of about 45, which is more than double the P/E of many companies in the same industry.
HANS is itself a very divisive stock, and in between takeover rumors on the company there have been other negative commentary and rumors.
On July 9, 2007 Goldman Sachs was rumored to have suggested that a bidding war could occur for HANS and that it would exceed $60 per share. The same day, however, Goldman Sachs came out and officially denied the takeover comments.
So while the company is growing and speculation has run rampant, there is certainly a section of the market that believes HANS is not a takeover target and is overpriced.
While Hansen offers a variety of drinks, its main source of revenue is its energy drink Monster. Monster is currently the number 2 brand in energy drinks, owning approximately 15.3% of the market share of all energy drinks (14.4% for Monster and .9% for Monster XXL energy drink market share for the year ending December 31, 2006). Number one in energy drinks, and Hansen's biggest competitor, Red Bull, controls 42.6% of the market share for energy drinks. In 2004 Red Bull controlled 68.4% of the market share while Monster controlled only 4.6% (energy drink market share as of July 11, 2004) and was fifth in market share. Monster's market share has taken off, at the expense of Red Bull, Pepsi and Coca-Cola.
A Leveraged Buyout Is Less Likely (LBO)
While we feel that HANS would be a good takeover target for a larger company, we doubt that a leveraged buyout will occur. Hansen currently has $330M in current assets or 8% of its market cap. Free cash flow for Hansen is comparatively small at less than 1% of its market cap. In other words, it would be quite a stretch for private equity to get the funding necessary for a leveraged buyout. However, Hansen is growing, and their significant growth would definitely be attractive to private equity.
While it is possible that HANS could receive a bid from private equity, we feel that it is much less likely than the chance it will receive a bid from a larger company.
Anheuser-Busch Companies Inc (BUD) Acquiring Hansen Would Fit
By far, the most common takeover rumors that circulate on HANS put BUD as the acquirer. These HANS takeover rumors by BUD circulated almost every week in April and May of this year with the rumored price in the mid $50s per share, which would put the price of the company at about $5B (a 25% premium from current levels).
BUD currently has $2.2B in current assets and would have to get financing of some sort in order to acquire HANS, which most likely wouldn't be a problem. A takeover of HANS by BUD is certainly feasible.
BUD generates the majority of its income from beer production, and has seen very little growth in earnings over the past several years. A company in a similar industry that shows significant growth potential and has had good growth in the past would certainly be an attractive target for BUD to increase their growth, expand the company, enter new markets, and attract new shareholders. The two companies would make a great match.
Coca-Cola Co (KO) Might Be Interested, but Probably Won't Do Anything
While the growth in Coca-Cola recently has not been as slow as in Anheuser-Busch, there is still a small possibility that they might be interested in acquiring HANS. They currently own over 400 different brands of non-alcoholic beverages. KO has a current market cap of $125B with $10.5B in current assets (as of March 2007, before the acquisition of Glaceau) and could easily acquire HANS if it wanted to.
Coca-Cola already owns the energy drink called Full Throttle, which had approximately 7% of the energy drink market share last year. An extra 15.5% of the market share would be tempting to pick up.
However, in June of 2007 KO acquired Energy Brands, Inc (known as Glaceau), so the probability that they would put in an offer for HANS is much less likely. While “Energy Brands, Inc” doesn't market similar energy drinks, it was still a large acquisition for KO.
While KO might be interested in furthering their growth and market dominance, they already have their hand well into the energy drink business, and with this recent acquisition we feel that a takeover by KO is much less likely in the near future.
PepsiCo, Inc. (PEP) Is Likely to Acquire HANS
Right behind Coca-Cola in market cap is Pepsico at $110B. Pepsico also has almost $9B in current assets, so HANS would be relatively easily acquired if Pepsico decided to make an acquisition.
Pepsico currently owns the energy drink Amp (from Mountain Dew). Unfortunately, AMP only carries 3.6% of the market for Energy Drinks. Sobe Adrenaline Rush currently carries another 2.9% of the market share, Sobe Lean another 0.7% (Pepsi owns Sobe), giving Pepsi a total of 7.2% of the market share. Pepsi could have significant interest in picking up an extra 15.5% of the market share for Energy Drinks and continue to grow their market share to better compete with Red Bull.
In addition, where Coca-Cola recently made such a large acquisition, Pepsi could feel pressure from its investors and competition to make a similar large acquisition. Hansen would fit perfectly and more than triple Pepsi's current market share for energy drinks, allowing them to dominate Coca-Cola in yet another market.
HANS Will Most Likely Get Taken Over
While Hansen Natural Corporation continues to grow and take market share from competitors their attractiveness to other companies also grows. Any company that can go from being ranked fifth in market share to second in the space of two years stands a chance at overtaking the leader in the coming years. Owning such a company would be a smart move for everyone from private equity to large competitors like Anheuser-Busch, Coca-Cola or Pepsi.
Note: This blog is intended to analyze only the rumors, and is not intended to analyze the stocks themselves. By using this site you agree that before making any financial decision you will consult both your attorney and your financial advisor.
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