Frenchs mustard could soon be on block

French's mustard could soon be on block

Reckitt Benckiser, the UK consumer goods group behind brands including Durex condoms and Flash bleach (and, soon, Enfamil infant formula) looks set to sell off its food division. The company this week announced it would hold a "strategic review" on the "non-core" unit, which contains brands including French's mustard and Frank's Red Hot sauce. If RB parts company with the unit, a move analysts regard as a consequence of the group's focus on "consumer health", which companies may be interested in its condiments? John Shepherd looks at which suitors could be keen as mustard - and why.

On Monday, following speculation in the mainstream UK press over the weekend, Reckitt Benckiser, the UK consumer goods group set to buy infant formula business Mead Johnson, admitted it would start to "explore all options" for its existing food business.

RB houses its food assets in French's Food, a division home to products including French's mustard and Frank's Red Hot sauce. The company's announcement of plans to hold a "strategic review" on the unit immediately prompted speculation about which businesses could be interested in the portfolio if it were put up for sale. And industry watchers broadly believe French's Food is most likely to be snapped up as a bolt-on for a packaged food manufacturer.

Revenue from RB's food business has risen steadily in recent years. Net sales from the division were GBP316m (US$394m) in 2014, GBP349m in 2015 and GBP411m in 2016 - with like-for-like growth last year of 5%. However, the unit represents only 4% of RB's overall net revenue.

Darren Shirley, an analyst covering RB at UK stockbrokers Shore Capital, says he was not surprised by the company's announcement. Food, he said, had "always sat slightly oddly with the rest of RB's brand portfolio".

Shirley tells just-food: "If you look at where RB is, it classes itself as a consumer health care business that has built itself around home care and cleaning products and, more recently, it's gone into consumer health care. In terms of the food business, I think it has always been a case, as far as the company is concerned, of ensuring it has sufficient resources and that it is run well."

Shirley argues RB has always seen food as a potential "resource" to help it move into an area "more complementary to the rest of the business", should that day come along. "It's come to that moment now," he adds.

Chris Wickham, an FMCG analyst at UK equity research firm Whitman Howard, says RB "is on the verge of embarking on a sizeable ambitious project - not just the Mead Johnson deal but a consolidation within the global consumer health industry".

He tells just-food: "Consumer health is unbelievably fragmented, with around 80% of consumer health products globally not in the hands of the top six players. Also, RB is the only specialist consumer health firm in the top six. The others are simply offshoots of pharmaceuticals companies. If you want to be the primary consolidator of 80% of the world's consumer health industry, the disposal of a mustards business is not going to have much impact, without wishing to belittle anybody or any company involved in that process."

Ketchup and mayonnaise maker Kraft Heinz has immediately been touted as a potentially interested buyer, a move Barclays analyst Andrew Lazar believes would make "clear strategic and financial sense".

"We believe this asset largely consists of French's Mustard and Frank's Red Hot Sauce, brands that complement Kraft Heinz's current condiments portfolio (Heinz ketchup, Grey Poupon mustard), which could suggest a potential for operational synergies," Lazar said in a note to clients this week.

Nevertheless, Lazar argued French's Food would catch the eye of a number of potential suitors. "We believe this potential divestiture is likely to strike the interest of broader strategic as well as financial players," he suggested.

"Given the strong market share positions (by our math, French's commands a 34% share and Frank's Red Hot a 10% share of their respective categories) and high margin profile of this asset (circa 30% profit margin in aggregate, by our estimate), we would not be surprised if this potential divestiture garners a high level of interest across the US food group," Lazar said, alluding to interest in the unit among listed US food companies beyond Kraft Heinz.

Potential suitors, Lazar suggested, could include US spices and sauces maker McCormick & Co., the company behind brands like Stubb's barbecue sauce.

McCormick yesterday (4 April) held an investors' day event at which CEO Lawrence Kurzius said the company sees "condiments and sauces as core" to its business. "We actually think we bring quite a lot to the party there," he added.

Officials at McCormick could not immediately be reached for further comment on the company's ambitions in condiments.

Pinnacle Foods, meanwhile, is another big hitter that could find "the centre-store presence and high margin profile highly appealing", Barclays' Lazar said. The US group, which has Bernstein's and Wish-Bone salad dressing in its portfolio, has, Lazar contended, "been rather explicit about its desire to complete a transformative acquisition in the near-term, in our view, and already possesses a very large shelf-stable business".

Shore Capital's Shirley says he "would not rule anything out", although he believes a trade buyer is "more likely" than one from private equity. "If you are an existing player, you can come in and strip out costs and get a bit more margin," he says. "I would say you are looking at the likes of General Mills and Kraft Heinz. I would say French's would be a swallowable acquisition for any of those bigger guys and would in term give them a bit of top line. For a lot of these businesses, it would be a decent bolt on and there would not be anything structural to bust the balance sheets."

He added: "If you look at a lot of consumer packaged grocery business in America, growth is very hard to come by at the top line level. That's because new and more niche brands are coming in and gaining more shelf space and more market share. So the fact that French's last delivered 5% organic growth on the top line and has got a nice healthy margin just shy of 29%, that would be attractive to a number of players."

Whitman Howard's Wickham adds Unilever into the "mix" of potential future homes for French's and its associated products, although, wisely, he cautions the company's interest would depend on what it plans to do with its own food assets. In February, in the aftermath of Unilever's decision to rebuff Kraft Heinz's proposal to buy the business, the UK-listed consumer goods group announced it would review its operations to "accelerate" the value it could give to its shareholders. The results of that review were due to be published by "early April".

Wickham says: "Any food manufacturer that is good at dressings might want to expand into this market. French's has very little market share in the UK and [Unilever mustard brand] Colman's has very little market share in the US. So, for Unilever, that's a potential fit, depending on what it might be planning to do with that side of its business."

Wickham agrees Kraft Heinz could "fancy its chances" of spicing up its existing portfolio, although he notes the group "are not into the same sort of presence having mainly ketchups and spreads". However, such an acquisition "would be no big deal for either Unilever or Kraft Heinz", Wickham reflects.

"For Unilever, which is a EUR50bn business with an operating margin of 15%, and making EUR7.5bn a year in terms of operating profit, it doesn't really have much to speak of in terms of finance charges - and you can certainly take those out of each individual division. So we are talking about a company with a cash flow of some EUR6-8bn a year. The acquisition from RB would not be that difficult for Unilever, say making it well within one year's cash flow. That's the criterion - a bolt-on that would fit the cash flow."

However, Wickham argues private equity will "absolutely not" be in line to pick up the business. "There is no way the entry value would appeal. PE looks to go in and buy businesses, gut them out, turn them round and do things that could not be done in the public arena," he says. 

Wickham argues the usual exit strategies for private equity - a sale or IPO them - "is not really an option here". He explains: "French's is a fully invested brand making 29% operating margins, it's unbelievably well-run according to the RB model with extremely incentivised senior management and very tight criteria on things like working capital on margins and revenue growth."

Given Unilever's recent record of selling off assets in food - and the uncertainty at the time of writing at what it plans to do with those it has left - it would be a surprise if the Hellmann's mayonnaise maker moved for French's Food.

More likely is one of the possible US suitors put forward this week. All eyes will be on the likes of Kraft Heinz, McCormick and Pinnacle in the coming weeks.