Iconic spice and flavor company, McCormick has exploded into the condiment category after agreeing to acquire the food division of Reckitt Benckiser (RB Foods) – maker of Frank’s RedHot sauce and French’s Mustard for $4.2 billion.
Although the price is considered somewhat high by industry insiders who expected RB Foods to fetch in the area of $2.9B, the acquisition will launch McCormick into a leading top-10 position within the U.S.condiment space, while strengthening its position as a flavor provider – two things that tap into the push by consumers for healthier foods that still retain flavor.
James Edwardes Jones, analyst with RBC Capital Markets told Bloomberg that the deal “feels to us like a very high price for a U.S.-oriented ambient food business.” Not surprising as the price is seven times RB Foods’ annual sales and 20 times its earnings before interest, tax, depreciation, and amortization (EBITDA) compared to an average across the industry of 3.3 times sales, and 16.2 time EBITDA, according to Food Navigator.
Be that as it may, the acquisition of Frank’s RedHot sauce – the number one hot sauce brand in the rapidly growing hot sauce category across all of the U.S. and Canada, and the French’s brand – also the number one in its category, is highly advantageous, not to mention the additional range of iconic brands including Cattlemen’s BBQ sauce that McCormick expects to lift its pro forma 2017 annual net sales to $5 billion.
“The acquisition of RB Foods strengthens McCormick’s flavor leadership with the addition of the iconic French’s and Frank’s RedHot brands to our portfolio, which will become our number two and number three brands, respectively,” said Lawrence E. Kurzius, McCormick chairman, President and Chief Executive Officer.
“The addition of Frank’s RedHot Hot Sauce, the clear consumer favorite in an attractive and high-growth category, French’s Mustard and the other beloved products enables McCormick to become a one-stop shop for condiment, spice, and seasoning needs, providing our customers and consumers with an even more diverse and complete flavor product offering.”
Other factors connected to the deal that McCormick sees as driving value include:
- The addition would advance the company’s Bring the Joy of Flavor to Life initiative
- Synergies would be generated as a result of leveraging seasonal holiday promotional and grilling events that include existing McCormick brands including Lawry’s and Grill Mates.
- The expansion of McCormick’s Industrial segment by more than 50 percent in the U.S. and Canada.
- The ability to leverage its global infrastructure network to expand the world wide presence of Frank’s RedHot and French’s through deeper household penetration.
- Realize cost synergies of about $50 million by 2020 due to increased sales.
- Achieve meaningful accretion to its margins and adjusted earnings per share.
“This transaction reinforces our focus on growth, reflecting McCormick’s commitment to making every meal and moment better and driving significant shareholder value,” said Kurzius. “We have great respect for RB Foods and the strong business its employees have built. McCormick will be able to grow these brands in new and unique ways through our proven track record of insight-driven innovation and the ability to leverage our global footprint. We are confident McCormick is the perfect home for RB Foods’ popular brands and employees.”
The deal, which McCormick plans to fund through a combination of equity and debt with in-place committed bridge funding, is expected to close in the third or fourth quarter of McCormick’s FY2017 pending regulatory approvals.
-Lynda Kiernan
Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration please contact Ms. Kiernan at lkiernan@globalaginvesting.com
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