McCormick has agreed to buy Reckitt Benckiser’s food business, including brands like French’s mustard and Frank’s RedHot sauce, for $4.2 billion.
It follows RB’s announcement in April that it would sell its food assets to cut debt, in the wake of its $18 billion acquisition of infant formula producer Mead Johnson.
The unit made $179 million in pre-tax profit in 2016, but is largely periphery for consumer goods giant RB, which performs much stronger in domestic products and personal care.
With long-term debt of £804 million and borrowing facilities totalling £3.5 billion, it makes sense for RB to strip off its non-core food assets, generating useful funds to lower group debt and help ease pressure from its investors. But why would McCormick, a flavour company, want to acquire a brand of mustard and a brand of hot sauce?
In the company’s own words, French’s and Frank’s RedHot will turn McCormick into “a one-stop shop” for its customers’ condiment, spice and seasoning needs, providing them with “an even more diverse and complete flavour product offering”.
It expects the integrated food business to generate ‘meaningful’ margin expansion and produce ‘significant’ cost synergies in the region of $50 million. The brands will benefit from McCormick’s global reach, leveraging existing infrastructure and knowhow in the condiments category.
The brands will complement Lawry, McCormick’s range of barbecue seasonings and marinades – as well as Grill Mates, its brand of seasonings for meat. The company also owns Stubb’s, the branded line of authentic barbecue sauces.
Tellingly, the company puts Frank’s RedHot sauce above French’s mustard in terms of importance – and it’s the one that fits most with this existing portfolio.
In his comments on the acquisition, McCormick chief executive officer Lawrence E Kurzius called Frank’s RedHot “the clear consumer favourite in an attractive and high-growth category”.
McCormick anticipates that hot sauce will continue to see robust growth, and with insight-driven innovation and a passionate and increasing fan base, there are significant opportunities for further expansion. Greater influence from millennial households will help to create substantial upside for hot sauces, and there are several ways that McCormick can cross-promote Frank’s RedHot sauce with its other brands.
In addition to retail, RB’s food brands have attractive positions across hot sauce, mustard, crispy vegetable and barbecue sauce sold through the US and Canadian foodservice channels. McCormick expects the acquisition to add over 50% to its foodservice sales in the US and Canada.
The company said: “French’s and Frank’s RedHot are ideal additions to McCormick’s tabletop offering and its established products.”
Why not Unilever?
For a while, the more likely suitor seemed to be Unilever, after CEO Paul Polman confirmed that it would investigate the viability of buying the business. Only this week, reports suggested that Unilever and Hormel Foods were the only bidders remaining. But it’s McCormick that prevailed, with a $4.2 billion valuation that was higher than many of the more liberal predictions.
As strong as they are, brands like French’s and Frank’s RedHot sauce just don’t stand up to Unilever’s portfolio. The Anglo-Dutch company has major labels like Hellmann’s, Maille and Colman’s – already competitors for French’s mustard – and it recently acquired premium condiments brand Sir Kensington’s in the US. It’s possible there just wasn’t room for RB’s brands. In contrast, for McCormick, French’s mustard and Frank’s RedHot sauce will become the company’s second and third largest brands respectively.
The financials didn’t add up either: RB’s food unit made $179 million in pre-tax profit in 2016 with net revenue of $564 million. That will be a good fit for McCormick, which currently has sales of $4.4 billion a year, but it’s not so significant to Unilever – a €52.7 billion consumer goods giant.
Unilever has set out its stall. There’s still no buyer for its spreads business, which it said it would sell in April, and the company has told investors that it will be focusing on driving volume growth and improving its operating margin in the year ahead. It looked into RB’s brands, but they won’t now have a role to play in that.
Talking about the acquisition, Kurzius said: “The acquisition of RB Foods strengthens McCormick’s flavour 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. RB Foods’ focus on creating products with simple, high-quality ingredients makes it a perfect match for McCormick as we continue to capitalise on the growing consumer interest in healthy, flavourful eating.
“RB Foods’ track record of creating market-leading products and its dedicated state-of-the-art manufacturing facility are a strong complementary fit that we expect will strengthen McCormick’s business opportunities as we expand our presence in condiments, a core category for the company in the US and internationally.
“This transaction reinforces our focus on growth, reflecting McCormick’s commitment to making every meal and moment better and driving significant shareholder value. 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.”
We expect to see the transaction close in the third quarter of the year.
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