Costly condiments
DID McCORMICK OVERPAY FOR FRENCH’S MUSTARD AND FRANK’S REDHOT SAUCE?
McCormick & Co. agreed to acquire Reckitt Benckiser Group PLC’s f ood business for US$4.2 billion, adding French’s mustard and Frank’s RedHot sauce to its lineup of spices and seasonings.
The deal brings a stable of well- known condiments to Sparks, Md.- based McCormick. For Reckitt Benckiser, unloading t he products continues an overhaul that began with an expansion into baby formula through the British company’s acquisition of Mead Johnson Nutrition Co. for US$16.6 billion.
The transaction price equates to 20 times the division’s earnings before interest, tax, depreciation and amortization, “which feels to us like a very high price for a U. S.- oriented ambient food business,” James Edwardes Jones, an analyst at RBC Capital Markets, wrote in a note. He expects the transaction to dilute RB’s earnings per share by about 1 per cent.
Concerns t hat McCormick may have overpaid weighed on its shares on Wednesday. T he stock dropped as much as 7.1 per cent to US$90.25, its biggest intraday decline in more than three years. Reckitt Benckiser stock rose 1.4 per cent in London, extending its increase for the year to about 15 per cent.
The deal comes as speculation swirls about the next round of consolidation in the packaged- food business. In February, Kraft Heinz Co. was spurned in a blockbuster bid to take over Unilever, the British- Dutch maker of Hellmann’s mayonnaise and Knorr soup. In the aftermath, Unilever was cited by analysts as a possible bidder for the Reckitt business.
Nestle SA, the world’s largest food company, is also shaking up its portfolio. Under activist pressure to improve results, it’s considering selling its U. S. candy operations. Investor Nelson Peltz’s Trian Fund Management this week set its sights on Procter & Gamble Co., the U.S. giant that competes with Unilever in personal care.
Led by chief executive Rakesh Kapoor, Reckitt said it was looking to unload its food business in April, when the Slough, Englandbased company described the division as “non- core.” With £411 million ( US$ 536 million) in sales last year, French’s Foods accounted for four per cent of Reckitt’s total revenue.
French’s and Frank’s RedHot will become McCormick’s second- and thirdlargest brands, respectively, CEO Lawrence E. Kurzius said in a statement late Tuesday. McCormick’s pro forma 2017 annual net sales are expected to be approximately US$ 5 billion, with significant margin growth, according to the statement.
In acquiring Reckitt’s food business, McCormick faced a large group of potential rivals. Bloomberg reported in May that the sale was expected to draw interest from Post Holdings Inc. and ConAgra Brands Inc. Other possible bidders included JM Smucker Co., Campbell Soup Co., Pinnacle Foods Inc. and Ajinomoto Co., people familiar with the situation said at the time.
In addition to selling yellow mustard and hot sauce, the division makes ketchup, onion flavourings and other products.
Hot sauce will continue to see robust growth, with opportunities for expansion, McCormick said. The company said it plans to expand t he global presence of Frank’s RedHot and French’s products, whose sales are now concentrated in the U. S.
McCormick dates to 1889, when founder Willoughby McCormick began selling flavours and extracts door to door. The company went after another U. K. business in 2016, when it considered buying Premier Foods PLC. But the suitor walked away from takeover talks in April of that year, saying that Premier was demanding too high a price. McCormick’s Kurzius said at the time that Premier was just one of the company’s M& A ideas.
Credit Suisse Group AG is serving as the financial adviser to McCormick on the RB Foods transaction, and Cleary Gottlieb Steen & Hamilton LLP is legal counsel.
Morgan Stanley acted as lead financial adviser to Reckitt and the company also received advice from Robey Warshaw.
The deal is expected to be completed in the third or fourth quarter of McCormick’s fiscal 2017, pending regulatory approvals.
McCormick plans to fund the deal with a combination of equity and debt, and said it has obtained committed bridge financing.
FEELS TO US LIKE A VERY HIGH PRICE.