BALTIMORE _ McCormick & Co. Inc. will take its biggest step yet into the condiments side of the food business with plans to fold iconic brands Frank's RedHot Hot Sauce and French's Mustard into its vast spice and flavorings portfolio.
The spice giant, based outside Baltimore, announced plans late Tuesday to acquire the food business of United Kingdom-based Reckitt Benckiser Group for $4.2 billion, which would catapult McCormick to a top spot as a U.S. condiment maker and give it brands it believes will appeal to consumers on an international scale. As the retail spice business in the U.S. has become more competitive with the rise of private label and smaller brands, the addition also would offer McCormick more diverse products and less exposure to the ups and downs of the spice market, experts said.
But investors appeared concerned McCormick will overpay, sending the stock price down more than 5 percent Wednesday to a close of $92.07 per share.
For its part, the company saw a chance to seize a long-awaited opportunity. Over the years, as it has expanded through acquisitions, McCormick has eyed the Reckitt Benckiser brands, and when the sought-after division was up for sale, stepped up with an aggressive bid, McCormick's CEO said a day after announcing McCormick's biggest acquisition ever.
"We really wanted it," CEO Lawrence E. Kurzius said, describing the competitive nature of bidding for the division that makes Frank's, French's and Cattlemen's brands. "The asset is incredibly strategic to us. ... We were willing to step up to stretch for it a little bit."
"The process was quite competitive," he said during a conference call with investors. "As we saw the value in the business, so did others."
The business' sales have been driven by its hot sauce, part of a category that's growing faster than herbs and spices, Kurzius said. He called the French's mustard brand iconic and compared consumer loyalty to Frank's hot sauce to the cult-like following of the Old Bay brand, also owned by McCormick. French's maintains the top market position in the U.S. and Canada mustard category, while Frank's is the top hot sauce brand. Millennial consumers, a key demographic for McCormick, have a strong affinity for hot sauce, he said.
"We see it as a liquid spice that consumers use in many different ways," he said. "Consumption has been quite strong, and Frank's has been the brand that has driven it."
Analysts said it made sense for McCormick to pursue the division, which Reckitt Benckiser wants to spin off to help pay for its $17.9 billion deal to buy baby-food maker Mead Johnson Nutrition Co.
"We definitely think this is a nice strategic fit for McCormick," said Brett Hundley, a senior equity analyst at Vertical Group in Richmond, Va. "This is business largely centered in the U.S. and Canada and owned by Reckitt, which is largely a European home and personal care products company. Reckitt didn't have the food relationships globally to expand this business beyond North America.
"What McCormick will be able to do is leverage its geographic footprint and knowledge of relationships within the food and condiments industry globally," he said.
McCormick already has a presence in the condiments category through previously acquisitions of the maker of Stubb's barbecue sauces for $100 million in 2015 and an earlier acquisition of Lawry's from Unilever for $605 million, but the overall condiments business is relatively small, ranking No. 10 nationwide.
Some observers were expecting a price tag of no more than $3 billion.
Though RB Foods offered no details on the bidding process, it is likely that multiple bids drove up the price, experts said.
"The price is a little steep," said Brittany Weissman, a consumer analyst with Edward Jones. "It's an expensive acquisition."
The company defended the deal, saying it will boost McCormick's earnings and profit margins and increase annual sales to $5 billion a year, up from about $4.4 billion. But it also will come with significant debt, about $3.7 billion. The increased debt load would lead to a temporary reduction in the company's credit rating, said Michael R. Smith, McCormick's chief financial officer,
In addition, the company expects about $140 million in transaction and integration costs, mostly this year.
But officials said they believe the price was comparable to similar deals and justified by the brands' growth potential and McCormick's ability to achieve cost synergies. It expects to save at least $50 million by 2020.
Reckitt Benckiser, a consumer conglomerate, also makes products such as Veet hair remover, Air Wick air fresheners, Lysol cleaner and Durex condoms. McCormick is only buying its foods division, which is based in Chester, N.J., and has close to 450 employees. The division operates a manufacturing plant in Springfield, Mo.
Rakesh Kapoor, CEO of RB, described McCormick as "owners who can provide the necessary resources, market expertise and global platform, whilst being a good home for our people."
A McCormick spokeswoman said it is too early to tell whether the acquisition will bring additional McCormick jobs to Maryland.
"Our integration team needs to go through the full review," said Lori Robinson, a spokeswoman. "We should have a better idea after closing."
Kurzius said the RB Foods brands have been successful and well managed by Reckitt Benckiser despite being a food asset "trapped inside a non-food company with no access to an international network."
"For us, this is going to be a core business, and we'll treat it accordingly," using McCormick's established global infrastructure to save money on making, marketing and distributing products both to individual consumers and to food service and restaurant customers, Kurzius said.
About 40 percent of McCormick's business comes from outside North America.
Karryl Leggio, a finance professor at Loyola University Maryland, said the acquisition is in line with the company's growth strategy, buying companies that will help it increase its size and scale but leaving in place recognizable brand names. She expects more to come.
"If you want barbecue sauce and there are eight choices and six are owned by McCormick, the likelihood that you 'll select one of their brands is high," Leggio said. "They will look for really strong brands within the seasoning category."
Hundley said he sees the RB Foods price as expensive but not out of line given the division's high margins, steady and attractive growth rate and opportunities for international expansion.
"It's not the first expensive deal that's ever happened for strategic purposes or reasons," Hundley said. He said he expects the division to generate enough cash to pay down the debt relatively quickly. "There's times it makes sense to pay up for an asset and times it doesn't, and this is one of those instances where this asset is worth the price tag because of future benefits for McCormick."
Weissman, too, said she sees the acquisition as a good strategic fit and expects the company will be able to pay down debt quickly and add value long-term.
"McCormick seems to be confident in its ability to generate synergies over the next couple of years," she said. "There is value added here even with the steep price. McCormick has a really good track record or acquiring companies, integrating companies and creating shareholder value. ... There's a fair amount of opportunity here."
