McCormick Now Owns Frank's RedHot Sauce, French's Mustard But At A Ridiculous Cost

Investors made it clear they weren't satisfied with McCormick & Company, Incorporated MKC's $4.2 billion acquisition of Reckitt Benckiser's food business which includes Frank's RedHot sauce and French's mustard -- and for good reason.

Shares of McCormick lost more than 5 percent Wednesday as the company agreed to pay a "scorching" amount of money for mustard and hot sauce, Gadfly's Chris Hughes argued. In fact, the price tag implies a multiple of seven times Reckitt Benckiser's estimated food sales and 25 times its forecast operating profit for 2017.

By comparison, prior food sector deals over the past year took place at an average of less than one times sales and 16 times operating profit. Needless to say, Reckitt Benckiser's investors were happy with their side of the deal based on the London-listed stock's more than 1.5 percent gain on Wednesday.

The Case For The Acquisition

There is some rationale for the deal, Hughes acknowledged. McCormick is acquiring high-margin brands with solid organic growth rates -- a rarity these days in the food sector. The company does boast a massive distribution network across the U.S. and could achieve much greater scale than Reckitt Benckiser ever could.

But at the end of the day, McCormick's return on invested capital would be just 4 percent, roughly half of what is needed for the deal to be worthwhile to shareholders.

"There's one more consolation," Hughes concluded. "It already owns the Maille French mustard brand that dates back to 1747, whereas French's Mustard isn't French. To some palates it isn't mustard either."

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Image credit: Mike Mozart, Flickr