$4B deal may widen McCormick’s reach

Spice giant plans to buy Reckitt Benckiser, maker of Frank’s RedHot Hot Sauce and French’s Mustard.

BALTIMORE — McCormick & Co.’s stock price dropped more than 5 percent Wednesday morning amid concerns that the spice giant will overpay for the chance to fold iconic brands Frank’s RedHot Hot Sauce and French’s Mustard into its vast spice and flavorings portfolio.

McCormick, based outside Baltimore, announced late Tuesday it plans to acquire the condiment food business of United Kingdom-based Reckitt Benckiser Group for $4.2 billion, catapulting McCormick to a top spot as a U.S. condiment maker and giving it brands it believes will become popular with consumers on an international scale.

The company has eyed the Reckitt Benckiser brands for years as it expanded through acquisitions and, when the chance arose, stepped up with an aggressive bid, McCormick’s CEO said a day after the company announced its biggest acquisition.

“We really wanted it,” CEO Lawrence Kurzius said of the division that makes Frank’s, French’s and other brands. “The asset is incredibly strategic to us . ... We were willing to step up to stretch for it a little bit.”

The Reckitt Benckiser division’s sales have been driven by its hot sauce, part of a category that’s growing faster than herbs and spices, Kurzius said. He called the French’s mustard brand iconic and compared consumer loyalty to Frank’s hot sauce to the cultlike following of the Old Bay brand, already owned by McCormick.

“We see it as a liquid spice that consumers use in many different ways,” he said. “Consumption has been quite strong, and Frank’s has been the brand that has driven it.”

Analysts said it made sense for McCormick to pursue the division, which Reckitt Benckiser wants to spin off to help pay for its $17.9 billion deal to buy babyfood maker Mead Johnson Nutrition Co.

But some observers were expecting a price of no more than $3 billion, explaining why McCormick shares were down $5.36 around noon Wednesday.

“The price is a little steep,” said Brittany Weissman, a consumer analyst with Edward Jones. “It’s an expensive acquisition.”

McCormick defended the deal, saying it will boost earnings and profit margins and increase annual sales to $5 billion a year, up from about $4.4 billion. But it also will come with significant debt, about $3.7 billion.

In addition, the company expects cash charges of $20 million related to the purchase and increased amortization, said Michael R. Smith, McCormick’s chief financial officer, who also said the increased debt load would lead to a temporary reduction in the company’s credit rating.

But officials said they believe the price is comparable to those paid in similar deals and is justified by the brands’ growth potential and McCormick’s ability to achieve cost synergies. It expects to save at least $50 million by 2020.

Brands managed by the Reckitt Benckiser division have succeeded, Kurzius said, despite being a food asset “trapped inside a non-food company with no access to an international network.”

“For us, this is going to be a core business, and we’ll treat it accordingly,” using McCormick’s established global infrastructure to save money on making, marketing and distributing products both to individual consumers and to food service and restaurant customers.

About 40 percent of McCormick’s business comes from outside North America.

Despite the higher than expected price, Weissman said she sees the acquisition as a good strategic fit and expects the company will be able to pay down debt quickly and add value long-term.

Reckitt Benckiser, a consumer conglomerate, also makes products such as Veet hair remover, Air Wick air fresheners, Lysol cleaner and Durex condoms. McCormick is only buying its condiments unit.