Did Celsius Make a $1.8 Billion Mistake?

Despite the stock being down 63% from its peak, few businesses have taken care of investors like Celsius (NASDAQ: CELH). In the trailing five-year period, shares have soared 2,500%. Volatility remains the key theme, though.

This beverage stock popped 27% on Feb. 20 after the announcement that Celsius will acquire Alani Nu. Then it gave back those gains, only to rise again over the past few weeks.

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Major corporate deals like this can have big implications. There are certainly merits to the transaction. But did Celsius just make a $1.8 billion mistake?

Terms of the deal

Alani Nu is a rapidly growing maker of health-focused and sugar-free drinks that has a huge following among younger women. Celsius agreed to pay $1.8 billion to buy its smaller rival, which includes $900 million in debt financing, $375 million in cash on hand, $25 million in earn-out payments, and $500 million in newly issued shares.

The purchase price places a value on Alani Nu of less than 3 times last year's revenue, or roughly 12 times EBITDA (after accounting for possible cost synergies). The deal is expected to close in the second quarter of this year.

Management's rationale

Some clear factors made Alani Nu an attractive acquisition target for Celsius. One obvious one is that it provides a major growth driver. In 2024, Alani Nu's retail sales surged 64%, faster than any other energy drink brand's and well ahead of Celsius' 22% gain. As a combined entity, the two can represent a significant portion of the health and wellness corner of the energy drink market.

The acquisition also gives Celsius, which might appeal to fitness enthusiasts, a new customer demographic. Alani Nu brings to the table its strong customer base of "younger, affluent, and female consumers." In other words, there might be minimal overlap among customers of the two brands, supporting incremental sales.

And from a financial perspective, Celsius expects cost synergies of $50 million. The deal should be accretive to cash earnings per share in the first year.

Challenging the decision

The leadership team's reasons to buy Alani Nu certainly make sense. But shareholders should consider the decision critically. For such a huge acquisition, it's important to try and understand if the deal makes sense or will prove to be a strategic blunder.

For starters, it's worth mentioning that the deal comes at a time when Celsius' revenue gains are under pressure. The company reported 3% sales growth in 2024, an alarming slowdown from previous years. The acquisition could signal that organic growth is getting harder to come by. Celsius' market share of 10.9% in Q4 was down from a peak of 12.3% in the first half of last year.

Moreover, Alani Nu's monster success makes you question why its management team wanted to sell, especially at a price-to-sales ratio of 3. That business was on a fantastic trajectory, so perhaps the revenue, earnings, and valuation would be significantly higher in a few years. Maybe Alani Nu's leadership team was concerned about its prospects.

Maybe the capital raised for the acquisition would've been better off directed to share buybacks. This is a valid argument considering the stock is trading 63% off its all-time high. Buybacks would've instilled confidence among investors, showing that executives believed the shares were undervalued.

Of course, time will ultimately tell if Celsius made the right call here. Existing shareholders and prospective owners must obviously be bullish on the Alani Nu acquisition if they want to stay put. I think a lot of uncertainties remain, so I suggest a more cautious approach from investors who are taking a closer look at Celsius for their own portfolios.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.