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McCormick Buys Reckitt Benckiser Food Unit for $4.2 Billion

July 19, 2017
The deal comes as speculation swirls about the next round of consolidation in the packaged-food business.

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 lineup of spices and seasonings.

The deal brings a stable of well-known condiments to Sparks, Md.-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 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 RB’s earnings per share by about 1%.

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

'Non-Core' Business

Led by Chief Executive Officer 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 pounds (US$536 million) 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 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 flavorings 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 flavors 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 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 Group AG is serving as the financial adviser to McCormick on the RB Foods transaction, and Cleary Gottlieb Steen & Hamilton LLP is legal counsel. Morgan Stanley acted as lead financial adviser to Reckitt and the company also received advice from Robey Warshaw.

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.

By Nick Turner and Craig Giammona

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