LONDON (Reuters Breakingviews) - Reckitt Benckiser is showing bigger rivals how it’s done. The British company has agreed to sell its food unit, home to French’s Mustard, for a spicy $4.2 billion to U.S. food group McCormick – a premium to what it looks to be worth, even with no recovery story and limited cost synergies. With buyers this hungry, less efficient peers Unilever and Nestlé ought to emulate the Reckitt recipe.
McCormick is laying it on thick by several measures. The Baltimore-based food group is paying 7.4 times the division’s 2016 sales or 20.4 times EBITDA. Average multiples for major deals in the sector since 2001 are 3.3 times sales and 16.2 times EBITDA, according to Bernstein analysts. Even factoring in the $50 million of annual cost savings McCormick says it can get – with a present value of roughly $370 million – McCormick is paying handsomely.
It’s not clear it can squeeze out anything that Reckitt hasn’t already. The division’s 5 percent 2016 like-for-like sales growth far outstrips the wider U.S. market for sauces and dressings. And with operating margins already at 29 percent, above those of super-aggressive cost-cutter Kraft Heinz, fresh efficiencies will be hard won. McCormick could introduce French’s and Frank’s RedHot Sauce to global dinner plates – but it’s not like the non-U.S. consumer lacks access to mustard.
The sale, which allows Chief Executive Rakesh Kapoor to pay down some of the debt from his $17.9 billion acquisition of baby-formula maker Mead Johnson earlier this year, also throws down the gauntlet to larger European consumer peers. Nestlé and Unilever, both more heavily exposed to the challenging packaged food category, have operating margins of 15 percent and 17.9 percent respectively in their most directly comparable divisions. That kind of inefficiency looks less tenable now that Nestlé is being needled by U.S activist Dan Loeb, and Unilever has rebuffed a bid from Warren Buffett-backed Kraft Heinz.
The Reckitt sale does suggest buyers are hungry – a positive with Nestlé looking at options for its slow-growing U.S. confectionery brand and Unilever considering a sale of its troubled margarine and spreads division. If they can’t copy Reckitt’s special sauce for better profitability, they should learn its recipe for knowing when to sell.
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