But, she still wonders if the deal was worth the $4.2 billion price tag.
The deal, announced late July 18, “brings [McCormick] very close to Kraft Heinz’s leadership position in the sauces, dressings and condiments in the US, with now just two percentage point difference in share,” Lianne van den Bos told FoodNavigator-USA.
According to McCormick this is a significant jump from its current position of number 10 in the US condiments category, which Euromonitor data shows is growing steadily at 4.7% to 4.8% year-over-year from $106 million in 2014 to $116.5 million in 2016.
Much of the category’s overall growth likely is due to increased consumer interest in bold flavors and easy access to global cuisine at home – two demands that condiments, sauces and dips easily fill. But in McCormick’s case the leg-up will come from more US-centric flavors with the addition of Frank’s RedHot, which is the No. 1 hot sauces brand in the US and Canada, and French’s Mustard, which also takes the top spot in its category in the US and Canada, according to the McCormick.
While the deal gives McCormick a significant visibility boost in the condiment, sauces and dips category, van den Bos questions whether it is worth the “hefty premium” McCormick paid for Reckitt’s food arm. She notes that Reckitt’s portfolio generated about only $338 million in sauces, dresses and condiments in 2016.
Bernstein analysts echoed van den Bos’ concerns, noting that the price tag was more than 7 times the business’ annual sales and 20 times its earnings before interest, tax, depreciation and amortization. This is compared to an average sales price in the industry of 3.3 times sales and 16.2 times EBITDA.
McCormick will focus on boosting margins
Despite these figures, McCormick appears nonplussed, noting in the announcement that it expects pro forma 2017 annual net sales to reach $5 billion. Plus, it says it expects “significant margin accretion.”
Strong synergies between the companies that will help McCormick achieve this goal include access to Reckitt’s “market-leading products and its dedicated state-of-the-art manufacturing facility,” according to McCormick.
Likewise, McCormick plans to use Reckitt’s strong presence in foodservice channels to increase its foodservice sales by more than 50% in the US and Canada.
For its part, McCormick brings to the table a broad global network through which it can increase distribution of the Reckitt legacy brands. It also brings a complementary product portfolio that it says it can leverage for seasonal holiday promotions and grilling events.
Finally, McCormick says it expects $50 million in cost savings – most of which will be achieved by 2020 – from its “increased scale,” which will help streamline the companies’ selling, general and administrative expenses and cost of goods sold.
McCormick’s strategy to focus on improved margins is especially timely given this is “a key focus area for many multinationals this year, especially within staple foods,” van den Bos said, adding that “Nestle and Unilever are two recent examples of falling victim to increased pressures from the investment community to make profit margins the number one priority.”
She also added that McCormick is well positioned to make good on this goal given the “strong synergies between the brands,” which she says, “offer plenty of opportunities for McCormick to bring operating costs down and increase profitability.”
As for Reckitt, the funds from the deal will help it pay down some of the debt it generated when it acquired Mead Johnson Nutrition and help push it closer to its goal of becoming a global leader in consumer health and hygiene, according to a company statement.
The deal is expected to close during the third quarter of 2017, but it subject to standard regulatory approvals.