€3.6bn mustard sale raises appetite for next food deal

Mustard is the new hot thing as US foods giant McCormick agreed to pay a scorching $4.2bn (€3.6bn) for Reckitt Benckiser’s food business, home to brands including French’s mustard and Frank’s RedHot sauce.

The deal comes as speculation swirls about the next round of consolidation in the packaged-food business. In February, Kraft Heinz was spurned in a blockbuster bid to take over Unilever, the British-Dutch maker of Hellmann’s mayonnaise and Knorr soup. In the aftermath, Unilever was cited by analysts as a possible bidder for the Reckitt business.

Nestlé, the world’s largest food company, is also shaking up its portfolio. Under activist pressure to improve results, it’s considering selling its US candy operations.

Investor Nelson Peltz’s Trian Fund Management this week set its sights on Procter & Gamble, the US giant that competes with Unilever in personal care.

On any conventional yardstick, Reckitt has secured a supersized price: Seven times the unit’s estimated sales and 25 times its forecast operating profit for 2017.

That compares with less than one times sales and 16 times operating profit for food sector acquisitions in the last three years, according to data compiled by Bloomberg.

The transaction price equates to 20 times the division’s earnings before interest, tax, depreciation and amortisation, “which feels to us like a very high price for a US-oriented ambient food business”, James Edwardes Jones, an analyst at RBC Capital Markets, said in a note.

Concerns McCormick may have overpaid weighed on its shares. The stock dropped as much as 7.1%, its biggest intraday decline in more than three years. Reckitt Benckiser stock rose 1.4% in London, extending its increase for the year to about 15%.

However, this was a scarce asset — a collection of high-margin brands delivering good organic growth. When such rare morsels come up for sale, buyers are willing to stretch. This one came along only because Reckitt’s strategy had shifted to infant nutrition.

Hence an auction that also attracted Unilever and at least one other US food group.

The flipside is that McCormick will need to take a very long-term view on the payback. Fortunately, the firm has a huge US distribution network and can plausibly distribute more of the acquired brands than Reckitt ever could. Unilever will be upset to have let this one go. But at least it hasn’t overpaid.

There’s one more consolation. It already owns the Maille French mustard brand that dates back to 1747, whereas French’s Mustard isn’t French. To some palates it isn’t mustard either.

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