McCormick warns investors away from mini-tender one day after acquiring Cholula hot sauce

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One day after McCormick & Company acquired Cholula hot sauce for $800m in a deal that will accelerate the spice company’s growth opportunities and expand its portfolio, the CPG giant is warning investors to reject an unrelated, unsolicited and undervalued mini-tender.

McCormick recommended Nov. 25 that stockholders reject an offer from TRC Capital Investment Corp. to purchase up to 750,000 shares of the company’s common stock for $176.38 per share, noting the offer prices was 4.46 percent below the closing price of the company’s common non-voting stock Nov. 13 when the offer commenced.

McCormick also warned stakeholders that mini-tender offers, like the one by TRC Capital, do not offer the same protections of larger tender offers under the US federal security laws because they are for less than 5% of a company’s shares, and therefore do not trigger SEC tender offer rules.

While legal, mini-tender offers “have been increasingly used to catch investors off guard” and often target less sophisticated investors who assume that the price offered includes the premium typical of larger, traditional tender offers, warns the Security and Exchange Commission. It adds that mini-tender offers do not give investors an opportunity to back out of a sale once they agree to it, causing the sale of securities often below market prices, SEC adds in a tip sheet for investors.

Given these risks and that the offer is under-valued, McCormick “urges stockholders to obtain current market quotations for their shares, review the conditions to the offer, consult with their broker or financial advisor and exercise caution with respect to TRC Capital’s offer.”

TRC’s offer for McCormick's shares is not unique in that it follows the Canadian investment firm’s playbook of offering mini-tenders for undervalued prices.

Earlier this year, TRC Capital offered to buy 4,000,000 shares of Elanco Animal Health Inc. for 4.5% lower than the closing price of the company’s common stock the last day before the offer commenced. It also offered in November to buy up to 2 million shares of Wabtec Corp.’s common stock for 4.53% lower than the closing price the day before the offer. TRC made similar mini-tender offers for Insurer Travelers in September and Broadcom Inc. in August.

Acquisition of Cholula expands foothold in ‘attractive, high-growth’ category

While unrelated, TRC’s offer came one day after McCormick announced Nov. 24 its intention to acquire Cholula hot sauce from the private equity firm L Catterton.

The deal gives McCormick another foothold in the “attractive, high-growth” hot sauce category with an iconic premium brand that is outpacing category growth, McCormick CEO Lawrence Kurzius said in a statement.

Under L Catterton, Cholula’s annual net sales rose to about $96m, household penetration increased by more than 50% and the brand gained “meaningful market share,” according to McCormick.

“As McCormick continues to capitalize on the growing consumer interest in healthy and flavorful eating, Cholula, a brand known for authentic bold and spicy Mexican flavors, is a strong complement to our portfolio providing consumers and foodservice operators with an even more diverse product offering that we expect will strengthen our growth opportunities,” Kurzius added in the statement.

McCormick’s portfolio already includes Frank’s RedHot branded hot and spicy sauces, which the spice giant acquired along with French’s and other brands in 2017 from Reckitt Benckiser’s Food Division for $4.2b. At the time of the deal, some wondered if the deal was worth the price tag, but within a year of the deal McCormick’s net income was up 60% thanks in part to the addition of Frank’s RedHot brand, which served as a source of inspiration across the company’s portfolio.

The current acquisition is expected to be completed by the end of the calendar year and should be accretive in 2021, according to McCormick.