Reckitt cuts the mustard with $4.2 billion food business sale

LONDON (Reuters) - U.S. spices maker McCormick & Co Inc MKC.N has won the battle to buy Reckitt Benckiser Group's RB.L North American food business, paying a higher than expected $4.2 billion to add extra seasonings and sauces.

London-listed Reckitt said in April it was reviewing options for the unit, which includes French’s mustard and Frank’s RedHot sauce, to cut debt following its $16.6 billion purchase of baby formula maker Mead Johnson.

The sale, announced late on Tuesday, will reduce Reckitt’s net debt to EBITDA ratio to 3.3 times from 4.1 times. It will enable it to focus more closely on its consumer health and home brands, which include Durex condoms and Mucinex cold medicine.

McCormick, maker of Lawry’s, Old Bay and Billy Bee honey, will gain a leading position in the U.S. condiments category. Still, the company’s shares fell more than 5 percent to a six-month low.

At $4.2 billion, the price represents a multiple of 19.6 times earnings before interest, tax, depreciation and amortization. According to Bernstein analysts, that is much higher than the long-term average of major deals in the sector, which is 16.2 times earnings. It is also higher than the 18 times earnings multiple that Reckitt paid for Mead Johnson.

“This seems pricey for a business that has only been growing sales at 3-5 percent in recent years, and that already has a very high (28.7 percent) EBIT margin,” Bernstein said, implying that cost savings may elusive.

Sources had estimated that the business, which attracted interest from several strategic U.S. players, would fetch more than $3 billion. They noted that private equity funds were not invited to the process as they would have had trouble competing on price with industry players.

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In the final stages of the auction, McCormick competed with Unilever ULVR.L and Hormel Foods HRL.N, one source said on Wednesday.

Unilever declined to comment, while Hormel could not immediately be reached.

Morgan Stanley analysts said the high price tag confirmed the value placed on unique assets like French’s, the world’s leading mustard brand.

Rating agencies S&P and Moody’s warned the acquisition could lead to downgrades in the spice maker’s credit rating.

Maryland-based McCormick, which expects the hot sauce category to maintain robust growth, said it had obtained bridge financing and expects to permanently finance the deal through a combination of debt and equity.

Last year it was rebuffed after approaching Premier Foods PFD.L, owner of British food brands including Mr Kipling cakes and Oxo stock cubes.

With this deal, McCormick expects to achieve “meaningful accretion” to margins and adjusted earnings per share, excluding transaction and integration costs. It expects cost synergies of about $50 million, most of those by 2020.

The combined entity’s 2017 pro forma net sales are expected to be about $5 billion, McCormick said. Reckitt shares closed up 1.6 percent.

Credit Suisse advised McCormick on the deal, while Morgan Stanley and Robey Warshaw advised Reckitt.

Additional reporting by Sangameswaran S in Bengaluru and Clara Denina in London; Editing by Keith Weir and David Gregorio