With the purchase of Reckitt Benckiser’s food division, McCormick is expanding its portfolio of spice and seasoning brands, reinforcing its status as a premier destination for enhancing the flavor of various dishes. As major food manufacturers face challenges due to consumers opting for fresher, more nutritious options over packaged foods, this acquisition positions McCormick to meet the public’s increasing desire for healthier eating without sacrificing the flavor they enjoy. The transaction is anticipated to significantly boost the company’s sales, with projections indicating an increase from $4.4 billion in fiscal year 2016 to approximately $5 billion.
Earlier this week, Unilever and Hormel were considered the leading candidates to acquire Reckitt Benckiser’s food business, which was estimated to be valued at around $3 billion. Although it remains unclear if there was a bidding contest for the division, McCormick’s willingness to invest about $4.2 billion demonstrates the Maryland-based company’s confidence in the long-term synergies that this merger could produce. This acquisition marks the largest in McCormick’s 128-year history. According to Morgan Stanley analysts, the high purchase price reflects the value of unique assets like French’s, renowned as the world’s leading mustard brand.
Lianne van den Bos, a senior food analyst at Euromonitor International, noted in an email that this deal brings McCormick closer to Kraft Heinz’s leading position in the U.S. market for sauces, dressings, and condiments, with a mere 2% difference in market share. “The strong synergies between the brands present numerous opportunities for McCormick to reduce operating costs and enhance profitability, a crucial focus for many multinationals this year, particularly in staple foods,” she remarked. However, she also pointed out that a price tag of $4.2 billion seems like a substantial premium for Reckitt’s food segment, which generated $338 million in sauces, dressings, and condiments in 2016.
Insiders in the industry revealed that Reckitt Benckiser aimed to sell its food division to finance its $16.6 billion acquisition of infant formula manufacturer Mead Johnson. The Financial Times reported that this business has limited exposure to emerging markets and relies significantly on U.S. sales.
This deal is relatively distinctive as it contrasts with the recent trend of smaller transactions in the food and beverage sector—a market many speculate is ripe for a major deal to stimulate sluggish growth and achieve cost savings through the integration of the two companies. An exception to this trend was Tyson, which announced in April its acquisition of convenience and ready-to-eat foods company AdvancePierre for $4.2 billion. Additionally, in April, Post Holdings acquired the leading British cereal brand Weetabix for $1.83 billion, while Campbell Soup bought the organic and natural food company Pacific Foods for $700 million earlier this month.
Many other proposed deals have been publicized only to collapse later due to pricing disagreements. For instance, Unilever turned down a $143 billion takeover bid from Kraft Heinz in February, and Mondelez announced last summer that it had ceased discussions with Hershey. Similarly, Conagra was denied in its attempt to acquire Pinnacle Foods earlier this year. Nevertheless, these failed negotiations have not diminished the excitement surrounding potential activity in the food sector. It seems inevitable that a mega-merger will occur that surpasses the $4.2 billion figures that both Tyson and McCormick have been prepared to invest.
Moreover, as McCormick integrates Reckitt Benckiser’s brands, the company could explore new product lines, including those enriched with calcium citrate granules, thereby diversifying its offerings and appealing to health-conscious consumers. The introduction of such products could enhance McCormick’s market share further, making it a formidable competitor in the evolving food landscape.