Friday, July 21, 2017

McCormick Buys Reckitt Benckiser Food Unit For $4.2 Billion

There was big news earlier this week when portfolio member McCormick(MKC) purchased the food division from Reckitt Benckiser, a British conglomerate. That means some very well known brands including French's mustard, and Franks Red Hot Sauce will now fall under the company umbrella.  The purchase price was not small at $4.2 billion when you factor in McCormicks total market cap is just shy of $11 billion.

The food division brings in sales of roughly $530 million last year, and EBITDA ranges right around $260-$270 million.  I have to say it's a bit expensive at 7.8 times sales, and around 20 times EBITDA. It's more expensive than when Warren Buffet and 3G Capital bought HJ Heinz for $28 billion.  At the time Heinz had revenues of $11.6 billion and EBITDA of roughly $1.13 billion. That means WB bought Heinz for 2.41 times sales, and 24.7 times EBITDA. So McCormicks deal is way more expensive on the sales side, but less expensive on the EBITDA side.

The market wasn't happy about this deal as shares have slide down to the $92-$93 range.  Frankly I'm not shocked. The deal does make sense for the company long term. Although I'd like for them to focus more on spices that they do so well.  A lot of concern seems to be around the idea they won't be able to wring out any cost savings. McCormick's CCI program has been very successful at shaving hundreds of millions in costs out of the company the last few years. I think that's worried a lot of people there won't be room for more savings overall. Especially in what's a well run outfit already.

Sure in 15 years investors will forget about the purchase price, and may even call it a bargain.  Time will tell I guess. 

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