McCormick & Co. got slammed by investors last week for agreeing to buy the French’s food business for $4.2 billion, a price that Wall Street deemed too high.
But the notion that the business could be acquired for something closer to $3 billion — a price cited in reports earlier this year — was based on bad information, McCormick Chief Executive Officer Lawrence Kurzius said in an interview. Companies offering anything near that price dropped out in early rounds of the bidding process, he said.
“The price that was floated was never in the cards — that speculation was not well-informed,” Kurzius said. “It was unfortunate that that was out there, but I’m really comfortable with what we paid.”
McCormick announced the deal late on Tuesday, agreeing to acquire French’s mustard, Frank’s RedHot sauce and other products from the U.K.’s Reckitt Benckiser Group Plc. The news sent the spice company’s shares down 5.2 percent the following day, marking their biggest dip since January 2014.
The transaction price equated to about 20 times the division’s earnings before interest, tax, depreciation and amortization, which RBC Capital Markets analyst James Edwardes Jones called “a very high price.”
When reports first surfaced in April that Reckitt was looking to sell the French’s business, news outlets said the division was valued at about $3 billion.
Many of the food industry’s biggest companies, including Campbell Soup Co., Conagra Brands Inc., Post Holdings Inc., Pinnacle Foods Inc. and J.M. Smucker Co., were seen as possible suitors for the Reckitt business, people familiar with the situation said earlier this year.
Given the competitive nature of the bidding process, there’s no way Reckitt would have agreed to anything in the $3 billion range, Kurzius said.
As McCormick looks ahead to integrating French’s, the company expects the deal to boost earnings in the first year. McCormick generates more than 40 percent of its revenue outside the U.S. and can use that international footprint to boost sales of the new products, Kurzius said.
The CEO said he’s taking Wall Street’s reaction in stride.
“Sometimes the market reacts in ways you don’t fully expect,” he said. “If I got a chip on my shoulder every time the stock went down, I’d be carrying a log on my back.”
(c) 2017, Bloomberg · Craig Giammona