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McCormick (MKC) Continues Buyout Spree, Buys FONA for $710M

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Zacks Equity Research
·4 min read
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McCormick & Company, Incorporated MKC has been focused on strategically strengthening the portfolio through meaningful acquisitions. The company took another step in this direction when it announced that it has bought 100% stake in FONA International, LLC and some of its affiliates. McCormick has acquired FONA for $710 million. The deal will be financed with cash and commercial paper.

FONA: A Worthwhile Bet

FONA is a well-known producer of clean and natural flavors that are used in the food, beverage and nutritional markets. FONA’s diverse portfolio will help McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. Moreover, by acquiring FONA, McCormick is increasing production capacity, while augmenting the technological platform.

Additionally, FONA's extensively skilled research and development team will enhance McCormick's innovation capabilities. FONA's strong market position in flavoring health and performance nutrition products also bodes well for McCormick's health and wellness portfolio. Apart from these, the acquisition will enable McCormick to increase consumer base and strengthen the existing customer relationships by cross selling.


 

We note that FONA's yearly net sales are nearly $114 million. The metric is anticipated to grow in the mid-to-high single-digit rate. McCormick expects FONA's addition to be accretive to its gross margin. Moreover, management anticipates expanding its margin further through strong revenue growth. Apart from this, shift of the Flavor Solutions portfolio toward increased value-added and technically insulated items is likely to contribute to growth. The company envisions the deal to be neutral to adjusted earnings per share (EPS) in 2021. That said, the acquisition is likely to be accretive to adjusted EPS in 2022, excluding transaction and integration costs.

Although the deal will lead to a rise in McCormick's net-debt-to-adjusted EBITDA ratio, it is committed to maintaining a strong investment grade credit rating and reducing debt with anticipated strong cash flow generation. Management is also on track with its dividend policy.

Other Acquisition Efforts

McCormick has long been strengthening the business through prudent acquisitions. Recently, it acquired the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand. The company believes that the buyout of Cholula accelerates its growth potential across the condiment platform and widens the product portfolio in the hot sauce category.

Additionally, McCormick’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. Notably, Frank's RedHot and French's Mustard hold important positions in the company’s condiment portfolio. As a result, these brands position it in the leading U.S. condiments category.

Impressively, shares of this Zacks Rank #3 (Hold) company have increased 11.5% over a year compared with the industry’s 2.2% growth.

Better-Ranked Food Stocks

B&G Foods, Inc. BGS — sporting a Zacks Rank #1 (Strong Buy) at present — has a trailing four-quarter earnings surprise of 9.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Hain Celestial HAIN, currently holding a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 24.6%, on average.

Sysco Corporation SYY, also a Zacks Ranked #2 stock, has a long-term earnings growth rate of 11%.

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