U.S. spices maker McCormick & Co Inc (MKC.N) has entered an agreement to buy Reckitt Benckiser Group’s (RB.L) food business for a higher-than-expected $4.2 billion to give it a wider variety of 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 its debt following the $16.6 billion purchase of baby formula maker Mead Johnson. That acquisition added a new product line and boosted its business in developing markets and the United States.
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 also enable it to focus more closely on its consumer health and home brands, which include Durex condoms and Mucinex cold medicine.
It gives McCormick, the maker of Lawry’s, Old Bay and Billy Bee honey, a leading position in the U.S. condiments category.
At $4.2 billion, the price represents a multiple of more than 7 times the annual sales from the business and 20 times its earnings before interest, tax, depreciation and amortisation.
That is much higher than the long-term average of major deals in the sector, which Bernstein analysts say is 3.3 times sales and 16.2 times EBITDA.
Sources had previously estimated that the business, which attracted interest from several other U.S. players, would fetch more than $3 billion.
RBC Capital Markets analysts said it “feels to us like a very high price for a US oriented ambient food business”. Morgan Stanley analysts said the high price tag confirmed the value placed on unique assets like French’s, which is the world’s leading mustard brand.
Reckitt shares were up 1.3 percent at 0830 GMT, Reuters reports.
McCormick, which expects the hot sauce category to continue seeing robust growth, has been trying to expand.
