McCormick buys Reckitt’s food busi­ness for $4.2bn

The Star Early Edition - - INTERNATIONAL - Nick Turner

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

PHOTO: 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.

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