LDN - Business

Reckitt cuts the mustard with $4.2 billion food business sale

[July 19, 2017] By Martinne Geller

LONDON (Reuters) - U.S. spices maker McCormick & Co Inc has won the battle to buy Reckitt Benckiser Group's North American food business, paying a higher than expected $4.2 billion to add extra seasonings and sauces.

London-listed Reckitt said in April it was reviewing options for the unit, which includes French's mustard and Frank's RedHot sauce, to cut its debt following the $16.6 billion purchase of baby formula maker Mead Johnson.

The sale, announced late on Tuesday, will reduce Reckitt's net debt to EBITDA ratio to 3.3 times from 4.1 times. It will also enable it to focus more closely on its consumer health and home brands, which include Durex condoms and Mucinex cold medicine.

It gives McCormick, the maker of Lawry's and Old Bay seasonings and Billy Bee honey, a leading position in the U.S. condiments category.

At $4.2 billion, the price represents a multiple of more than 7 times the annual sales from the business and 20 times its earnings before interest, tax, depreciation and amortization.

That is much higher than the long-term average of major deals in the sector, which Bernstein analysts say is 3.3 times sales and 16.2 times EBITDA.

Sources had previously estimated that the business, which attracted interest from several strategic U.S. players, would fetch more than $3 billion. They also noted that private equity funds were not invited to the process as they would have had trouble competing on price with industry players.

In the final stages of the auction, McCormick competed with Unilever <ULVR.L> and Hormel Foods <HRL.N>, one source said on Wednesday. That source also said that PE funds would have slowed the process due to more lengthy due diligence requirements.

Unilever declined to comment, while Hormel could not immediately be reached.

RBC Capital Markets analysts said it "feels to us like a very high price for a US oriented ambient food business".

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Cooking spices manufactured by McCormick & Co. are seen in this illustration photo taken in Adelphi, Maryland March 18, 2016. REUTERS/Jim Bourg

Morgan Stanley analysts said the high price tag confirmed the value placed on unique assets like French's, which is the world's leading mustard brand.

Reckitt shares were up 1.4 percent at 1100 GMT.

Rating agency Moody's said that the sale was credit positive for Reckitt as "the proceeds will be used to pay down some of the existing debt which will help faster deleverage."

Maryland-based McCormick, which expects the hot sauce category to continue seeing robust growth, has been trying to expand through acquisition.

Last year it approached Premier Foods, the owner of British food brands including Mr Kipling cakes and Oxo stock cubes, but was rebuffed.

With this deal, McCormick expects to achieve "meaningful accretion" to margins and adjusted earnings per share, excluding transaction and integration costs. It expects cost synergies of about $50 million, most of which by 2020.

McCormick said it had obtained bridge financing and expects to permanently finance the deal through a combination of debt and equity.

The combined entity's 2017 pro forma net sales are expected to be about $5 billion, McCormick said.

Credit Suisse advised McCormick on the deal, while Morgan Stanley and Robey Warshaw advised Reckitt.

(Additional reporting by Sangameswaran S in Bengaluru and Clara Denina in London; Editing by Gopakumar Warrier/Keith Weir)

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