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McCormick (MKC) to Acquire Cholula, Boost Condiment Platform

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Zacks Equity Research
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McCormick & Company, Incorporated MKC is focused on strategically increasing its presence through acquisitions to grow its portfolio. The company took another step in this direction when it signed a definitive agreement to acquire 100% stake in the parent company of Cholula Hot Sauce — a premium hot sauce brand that provides authentic Mexican flavor. The company will buy Cholula from L Catterton for $800 million in cash. The deal, which is likely to conclude by the end of 2020, will be financed with a combination of cash on hand and commercial paper.

Cholula's portfolio consists of six unique flavors, which are made in Mexico with high-quality ingredients. Moreover, these offerings are based on a 100-year old recipe that contains distinctive blend of fresh peppers and local spices. We note that McCormick plans to keep the Cholula brand name across its retail and foodservice channels.

McCormick believes that the buyout of Cholula accelerates its growth potential across the condiment platform and widens the product portfolio in the hot sauce category. Markedly, hot sauce is a fast-growing category. Cholula, being an iconic and premium brand, is outperforming the category growth.

Moreover, management expects to grow Cholula by improving category management as well as brand marketing. Also, the company expects to focus on expanding Cholula’s channel penetration. In this regard, it plans to increase Cholula's brand awareness, enhance product availability and introduce the brand in new formats and eating occasions.

Apart from these, McCormick's extensive presence across all foodservice channels is likely to solidify Cholula's go-to-market model. Along with this, the company’s culinary foundation as well as broad insights on menu trends is expected to drive growth and enhance Cholula's distribution and penetration.

Notably, Cholula's yearly net sales are nearly $96 million. The metric is anticipated to grow mid-to-high single digits in a normal environment after the coronavirus pandemic. Further, management believes that Cholula, which has an attractive margin profile, will be accretive to the Consumer and the Flavor Solutions segments (excluding transaction and integration costs). The company envisions the deal to be accretive to adjusted earnings per share in 2021.

McCormick is strengthening its spices and seasonings portfolio through prudent acquisitions.  Toward this end, the company’s acquisition of the food division of RB Foods (concluded in August 2017) is noteworthy. With iconic brands like Frank’s RedHot, French’s and Cattlemen’s, RB Foods is likely to continue being a profitable asset for McCormick’s flavor portfolio. These brands position the company in the leading U.S. condiments category and position it for international expansion.

We believe that the company’s acquisition of Cholula is likely to add another leaf to its growth story. Notably, shares of this Zacks Rank #3 (Hold) company have increased 9.9% year to date against the industry’s decline of 0.9%.

Some Solid Food Bets

Pilgrim’s Pride PPC, with a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 2.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Blue Apron Holdings APRN, with a Zacks Rank #2, has a trailing four-quarter earnings surprise of 30.3%, on average.

The Hain Celestial HAIN, with a Zacks Rank #2, has a trailing four-quarter earnings surprise of 24.6%, on average.

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