Please ensure Javascript is enabled for purposes of website accessibility

Hot Dog! McCormick Is Buying French's Mustard & Frank's RedHot Sauce

By Frank DiPietro - Jul 27, 2017 at 1:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

McCormick just spent $4.2 billion to become the No. 1 condiment company in America. Here is a look at the deal that McCormick management could not refuse.

McCormick & Company Inc. (MKC 2.74%) recently announced it will acquire the food division of British consumer goods company Reckitt Benckiser Group plc in a $4.2 billion deal that is expected to close later this year.

Many products familiar to U.S. shoppers will join McCormick, including Frank's RedHot hot sauce, French's ketchup, French's mustard, and Cattleman's barbecue sauce. The deal will make McCormick the largest supplier of condiments in the United States.

Condiments including French's Mustard, Frank's RedHot Sauce, and Catlleman's BBQ Sauce in containers.

Image source: McCormick.

The strategy of the deal

Health, hygiene, and home products produced the lion's share of Reckitt Benckiser's more than $12 billion in 2016 revenue. Its food division was expected to provide $581 million in 2017 sales and the business has been growing in the mid-single digits, according to McCormick's management. 

The way McCormick CEO Lawrence Kurzius described it, Reckitt Benckiser's food division was a "food asset trapped inside a nonfood company. ... For us, this is going to be a core business, and we're going to treat it accordingly."   

McCormick believes it can give the acquired brands a friendlier base of operations as its $4.4 billion in 2016 revenue came entirely from food products. Management feels the company's expertise in the food business can result in increased sales due to more exposure to both the industrial segment of the market (which includes customers like restaurants), where McCormick sold 40% of its products,  and internationally, where McCormick sold 42% of its products in 2016.

This deal is about Frank's RedHot sauce and French's mustard

McCormick is a leader in spices and seasoning, with about 20% market share in the packaged retail spices and seasoning category of foods on a global basis. The key brand that drove McCormick to make the acquisition is Frank's RedHot Sauce, the product with the largest growth potential in the portfolio of brands that came with the acquisition. McCormick sees Frank's RedHot Sauce as a "liquid spice" that's very popular with millennials and has a runway for growth. "... the hot sauce category and the Frank's RedHot brand, in particular, really drive the growth of the whole portfolio," said Kurzius.

Management believes it can expand Frank's brand beyond the United States and Canada by increasing its presence in the Asian marketplace, where Western condiments have become quite popular, particularly for table-top usage in restaurants, not a distribution channel that current ownership has access to. 

McCormick management stated that their goal is to Make Frank's RedHot sauce the No. 1 global hot sauce brand.

The company is also quite keen on French's mustard, the No. 1 brand in the U.S. and Canada.

Financial highlights

This deal did not come cheaply for McCormick, as there were other bidders in the mix. The Telegraph reported that both European consumer goods powerhouse Unilever NV and Hormel Foods Corp were also interested parties. The company viewed the purchase as a strategic acquisition and was willing to pay up to win the deal from these larger rivals.

The price tag was $4.2 billion, which is over seven times the food division's estimated 2017 revenue of $581 million. The chart below shows McCormick's price to sales multiple over the past three years, which barely ever reached three.

MKC PS Ratio (Forward) Chart

MKC PS Ratio (Forward) data by YCharts

The price tag of $4.2 billion will be paid all in cash. McCormick will finance the deal in two ways. The company will work with lenders to borrow $3.7 billion. The other $500 million will come in the form of an equity offering of the company's stock. The company also announced, in light of the deal, it will suspend its share buyback program to conserve cash. Management reiterated that the company plans to continue issuing its quarterly dividend.

The additional debt the company will take on will increase its borrowings from $804 million at the end of last quarter to a projected $4.5 billion when the deal closes.

McCormick's plan going forward

The company said it will update shareholders once the deal closes toward the end of this year. Until then, management will continue to focus on the current brands under the McCormick umbrella.

The company sees French's products being its No. 2 brand and Frank's RedHot Sauce as its No. 3 brand, both of which will help McCormick move up from its current position as the No. 10 condiments supplier in the United States to No. 1 stateside and No. 3 on a global basis.

This is a big investment for the company; the largest acquisition it has ever made. It is taking on a lot of debt to make the purchase. Time will tell if management is able to integrate the business, execute its plan, and reward shareholders with a higher stock price.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McCormick & Company, Incorporated Stock Quote
McCormick & Company, Incorporated
$87.84 (2.74%) $2.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.