Turns out, there is some appetite for all that packaged food for sale.
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McCormick & Co. said it agreed to acquire Reckitt Benckiser Group PLC's food division, whose brands include French's mustard, for $4.2 billion, the latest in a wave of deal activity in the global packaged-foods sector.
The transaction comes three months after the U.K. company put its food unit up for sale. Analysts at the time estimated that it could be worth $2.5 billion to $4 billion.
The agreement also comes amid a flurry of M&A activity in an industry looking to cut costs to insulate itself from slowing sales. Many companies are trying to change product mixes as consumers move to healthier or locally produced options. Low inflation has made it difficult to raise prices to make up for sluggish volume growth in many markets.
That has triggered a number of strategic reviews among big food firms. Unilever PLC, the Anglo-Dutch consumer-goods behemoth that earlier this year rejected Kraft Heinz Co.'s $143 billion takeover bid, has said it is planning to unload its margarine-and-spreads business. Switzerland's Nestlé SA last month put its U.S. confectionery business up for sale.
All of those assets on the market--at a time when the global packaged-food industry is facing headwinds on several fronts--raised questions about whether sellers might be able to unload their businesses at attractive prices.
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But recent deals--including Wednesday's agreement--suggest there are still plenty of strategic buyers willing to pay top dollar for good assets.
In April, cereal giant Post Holdings Inc. agreed to buy Weetabix Food Co., maker of the breakfast brand, for GBP1.4 billion ($1.83 billion). Post faced several other bidders for the brand, which China's Bright Food Group Co. and Baring Private Equity Asia had put on the block.
Bright bought its 60% stake in Weetabix in 2012 for GBP1.2 billion but never succeeded in turning it into a hit in Asia. Still, the price Bright ultimately got from Post translated into a higher multiple over adjusted earnings than some had expected.
Reckitt's food business, called RB Foods, was seen as one of the most attractive on the block in recent months. French's is America's best-selling yellow mustard. RB Foods other brands include Frank's RedHot sauce and Cattlemen's barbecue sauce.
Reckitt said it wasn't core, as it puts more emphasis on its home and personal-care offerings. In February, Reckitt agreed to acquire baby-food maker Mead Johnson Nutrition Co. for $16.6 billion.
RB Foods generated just GBP411 million ($536 million) of Reckitt's overall revenue of GBP9.89 billion in 2016. But its operating margins--considered close to 27% last year--are considered high for packaged food.
Sparks, Md.-based McCormick, whose current brands include Lawry's and Grill Mates, said it expects combined 2017 annual net sales of about $5 billion. It also projects the deal will generate cost savings of around $50 million, the majority of which will be achieved by 2020.
Though McCormick's leverage ratio will increase because of the deal, the company plans to maintain its dividend policy but curtail its share-buyback program in an effort to maintain its investment-grade credit rating, it said. Reckitt said it intends to use the proceeds from the deal to reduce its debt.
Write to Chip Cummins at email@example.com
(END) Dow Jones Newswires
July 19, 2017 06:25 ET (10:25 GMT)