McCormick Buys Reckitt Benckiser Food Unit for $4.2bn

The deal brings a stable of well-known condiments to Sparks, 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 amortization, “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 to investors. He expects the transaction to dilute RB’s earnings per share by about 1%.

McCormick shares dropped 0.1% in New York on Tuesday before the announcement and have gained about 4% this year. Reckitt stock rose 2% early on Wednesday in London, extending its increase for the year to 16%.

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 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, the US giant that competes with Unilever in personal care.

‘Non-core’ business

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 £411m in sales last year, French’s Foods accounted for 4% 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 on Tuesday. McCormick’s pro forma 2017 annual net sales are expected to be approximately $5bn, 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 and Conagra Brands. Other possible bidders included JM Smucker, Campbell Soup, Pinnacle Foods and Ajinomoto, 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 in the statement. 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.

Reckitt’s acquisition of Mead Johnson, announced in February, was an “inflection point” for the company, CEO 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.

Door to door

McCormick dates to 1889, when founder Willoughby McCormick began selling flavours and extracts door to door. It went after another UK business in 2016, when McCormick considered buying Premier Foods.

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.

Credit Suisse is serving as the financial adviser to McCormick on the RB Foods transaction, and Cleary Gottlieb Steen & Hamilton LLP is legal counsel.

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, and said it has obtained committed bridge financing.Fin24.com