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, 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 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 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 percent.
McCormick shares dropped 0.1 percent in New York Tuesday before the announcement and have gained about 4 percent this year. Reckitt stock rose 2 percent early Wednesday in London, extending its increase for the year to 16 percent.
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.
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 ($536 million) in sales last year, French’s Foods accounted for 4 percent of Reckitt’s total revenue.
French’s and Frank’s RedHot will become McCormick’s second- and third-largest brands, respectively, Chief Executive Officer 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.