McCormick (MKC) To Acquire Reckitt's Food Business For $4.2B

McCormick & Company, Inc. (NYSE:MKC) recently announced plans to acquire food division of Reckitt Benckiser Group plc, a British consumer products company, for $4.2 billion. The transaction, subjected to regulatory approvals, will be funded through a combination of debt and equity and is expected to be completed either in the third or fourth quarter of fiscal 2017.

Per Bloomberg, Reckitt has been looking to divest its food business since April, which invited many potential buyers including Post Holdings Inc. and Conagra Brands Inc. Other bidders included JM Smucker Co., Campbell Soup Co., Pinnacle Foods Inc. and Ajinomoto Co., as per sources. Unilever PLC (NYSE:UL) was also reportedly battling with meat producer Hormel Foods Corporation (NYSE:HRL) to buy the foods division of Reckitt Benckiser.

Why is the Buyout a Strategic Fit for McCormick?

McCormick, which is well known for manufacturing and distributing spices, seasonings, specialty foods and flavors to the entire food industry across the globe, has been strategically increasing its presence through acquisitions in order to grow its spices and seasonings portfolio. The acquisitions (Gourmet Garden in Apr 2016 and Enrico Giotti SpA in Dec 2016) contributed toward increasing sales by 3% during the second quarter of 2017, reported last month.

The acquisition of Reckitt’s food division is a strategic one as it will significantly boost the company’s robust spices portfolio with iconic brands like Frank's RedHot Hot Sauce, French's Mustard, French's Crispy Vegetables and Cattlemen's BBQ Sauce. Notably, both Frank's RedHot and French's Mustard hold top most positions in their respective categories in the U.S. and Canada. As a result, these brands will position the company in the leading U.S. condiments category and will strengthen and expand McCormick's business presence internationally too. The deal is also expected to result in combined pro forma 2017 annual net sales of approximately $5 billion.

Synergies

With the addition of foods business, McCormick expects cost synergies of approximately $50 million which will be achieved by 2020. The company expects to achieve significant margin and earnings accretion in 2017 and will achieve additional favorable impacts following the realization of targeted synergies.

Share Price Performance

A promising portfolio combined with robust initiatives has been favoring the company which is well reflected in the share price performance of the company. The company has also delivered positive earnings surprise in 12 of the last 14 quarters. Shares of McCormick have moved up 5.1% in the last six months against the Zacks categorized Food–Miscellaneous/Diversified industry’s decline of 5.6%. This Zacks Rank #3 (Hold) stock has a VGM Score of “B” which further makes it attractive.

However, negative impact of material costs and currency has been impacting the company’s performance of late. Currency headwinds of approximately 2% impacted the second-quarter results of the company. Such impacts are likely to persist throughout fiscal 2017.

Bottom Line

Nevertheless, McCormick is expected to overcome these challenges on the back of sustained cost savings efforts and the growth arising out of strategic acquisitions.

Stocks to Consider

Some better-ranked stocks in the industry are The Clorox Company (NYSE:CL) and Colgate-Palmolive Company (NYSE:CL) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Clorox and Colgate-Palmolive have long-term earnings growth rate of 6.8% and 9.2%, respectively.

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