McCormick buys Reckitt’s food business for $4.2bn
MCCORMICK & Company agreed to acquire Reckitt Benckiser Group’s food business for $4.2 billion (R54.24bn), adding French’s mustard and Frank’s RedHot sauce to its line-up of spices and seasonings.
The deal brings a stable of well-known condiments to Maryland-based McCormick.
For Reckitt Benckiser unloading the products continues an overhaul that began with an expansion into baby formula through the British company’s acquisition of Mead Johnson Nutrition for $16.6bn.
The transaction price equates to 20 times the division’s earnings before interest, tax, depreciation and amortisation, “which feels to us like a very high price for a US-orientated ambient food business”, James Edwardes Jones, an analyst at RBC Capital Markets, wrote.
He expects the transaction to dilute Reckitt’s earnings per share by about 1 percent.
McCormick shares dropped 0.1 percent in New York on Tuesday before the announcement and have gained about 4 percent this year.
Reckitt stock rose 2 percent early yesterday in London, extending its increase for the year to 16 percent.
The deal comes as speculation swirls about the next round of consolidation in the packaged-food business.
In February, Kraft Heinz 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.
Nestlé, the world’s largest food company, is also shaking up its portfolio. Under activist pressure to improve results, it is considering selling its US sweet operations.
Investor Nelson Peltz’s Trian Fund Management this week set its sights on Procter & Gamble, the US giant that competes with Unilever in personal care.
Reckitt said it was looking to unload its food business in April, when the England-based company described the division as “non-core”.
With £411 million (R6.93bn) in sales last year, French’s Foods accounted for 4 percent of Reckitt’s total revenue.
French’s and Frank’s RedHot will become McCormick’s second- and third-largest brands respectively, chief executive officer Lawrence Kurzius said in a statement on Tuesday. McCormick’s pro forma 2017 annual net sales are expected to be about $5bn, with significant margin growth, according to the statement.
In acquiring Reckitt’s food business, McCormick faced a large group of potential rivals. In May the sale was expected to draw interest from Post Holdings and Conagra Brands. Other possible bidders included JM Smucker, Campbell Soup, Pinnacle Foods and Ajinomoto, people familiar with the situation said then.
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 the global presence of Frank’s RedHot and French’s products, whose sales are concentrated in the US.
Reckitt’s acquisition of Mead Johnson, announced in February, was an “inflection point” for the company, chief executive officer Rakesh Kapoor has said.
He cited urbanisation, changes to China’s one-child policy, and increasing rates of women entering the workforce as reasons for entering the infant-nutrition market.
McCormick dates to 1889, when founder Willoughby McCormick began selling flavours and extracts door to door. It went after another British business last year, when McCormick considered buying Premier Foods.
But the suitor walked away from takeover talks in April 2016, saying that Premier was demanding too high a price.
The Reckitt 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 equity and debt. – Bloomberg
A shopper reaches towards a display of McCormick spices and flavourings in a supermarket in New York. The deal with Reckitt will add to McCormick’s range of condiments.