McCormick to buy Reckitt's food biz for $4.2 bn

Reckitt Benckiser stock rose 2% early Wednesday in London

McCormick & Co agreed to acquire Reckitt Benckiser Group Plc’s food business for $4.2 billion, 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 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 amortisation, “which feels to us like a very high price for a US-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.

McCormick shares dropped 0.1 per cent in New York Tuesday before the announcement and have gained about 4 per cent this year. Reckitt Benckiser stock rose 2 per cent early Wednesday in London, extending its increase for the year to 16 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 US candy operations. Investor Nelson Peltz’s Trian Fund Management this week set its sights on Procter & Gamble Co, the US giant that competes with Unilever in personal care.

Led by Chief Executive Officer  (CEO) Rakesh Kapoor, Reckitt said it was looking to unload its food business in April, when the Slough, England-based company described the division as “non-core.” With £411 million ($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 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 the global presence of Frank’s RedHot and French’s products, whose sales are now concentrated in the US

McCormick dates to 1889, when founder Willoughby McCormick began selling flavours and extracts door to door. The company went after another UK 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.

What the deal entails

• US-based McCormick added French’s mustard and Frank’s RedHot sauce to its stable in a $4.2-bn deal with Reckitt Benckiser
 

• French’s and Frank’s RedHot will become McCormick’s second- and third-largest brands, respectively
 

• For Reckitt Benckiser, unloading of products is part of an overhaul that began with the acquisition of Mead Johnson Nutrition for $16.6 bn 
 

• While McCormick shares fell 0.1% before the announcement, Reckitt Benckiser stock rose 2% early Wednesday 
 

• The deal comes in the wake as rumours about the next round of consolidation in the packaged-food business do the rounds