French’s, Frank’s RedHot brands sold
Concerns that McCormick overpaid for condiments weighs on its share price
NEW YORK— McCormick & Co. has agreed to acquire Reckitt Benckiser Group plc food business for $4.2 billion (U.S.), adding French’s mustard and Frank’s RedHot sauce to its lineup of spices and seasonings.
The deal brings a stable of wellknown condiments to the Marylandbased 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 Co. for $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 Reckitt Benckiser’s earnings per share by about 1 per cent. Concerns that McCormick may have overpaid weighed on its shares on Wednesday.
The stock dropped as much as 5.3 per cent to $91.97, 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.
The company said it plans to expand the global presence of Frank’s RedHot and French’s products, whose sales are now concentrated in the U.S.
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.
Led by chief executive officer 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 $536 million in sales last year, French’s Foods accounted for 4 per cent of Reckitt’s total revenue.
French’s and Frank’s RedHot will become McCormick’s second- and third-largest 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 $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 J.M. Smucker Co., Campbell Soup Co., Pinnacle Foods Inc. and Ajinomoto Group, 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 the 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 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.
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.