McCormick has signed a definitive agreement to snap up hot-sauce maker Cholula, in an $800 million all-cash deal, as the spices and condiments maker seeks to capitalize on the growing demand for flavorful eating.
McCormick (MKC) announced that it inked a deal to buy Mexican flavor hot sauce brand Cholula from private-equity firm L Catterton. The transaction is expected to be completed by the end of 2020, subject to customary closing conditions, and will be financed with a combination of cash on hand and commercial paper.
Upon closing of the deal, the company expects to incur transaction costs that will impact earnings per share. McCormick projects the transaction to be accretive to adjusted earnings per share in 2021.
“The acquisition of Cholula accelerates McCormick’s growth opportunities within our condiment platform and broadens our portfolio in the hot sauce category with the addition of the Cholula brand,” said McCormick CEO Lawrence E. Kurzius. “Hot sauce is an attractive, high-growth category and, as an iconic premium brand, Cholula is outpacing category growth.”
“Cholula, a brand known for authentic bold and spicy Mexican flavors, is a strong complement to our portfolio providing consumers and foodservice operators with an even more diverse product offering that we expect will strengthen our growth opportunities,” Kurzius added.
Cholula generates about $96 million in annual net sales. Revenue is expected to grow mid-to-high single digits beyond the COVID-19 pandemic. Cholula’s portfolio consists of six flavors made in Mexico and is based on a 100-year old recipe comprised of a blend of fresh peppers and regional spices. McCormick plans to retain the Cholula brand name in both the retail and foodservice channels.
The deal announcement comes just a day after McCormick announced a 10% increase in its quarterly dividend to $0.68 per share, payable Jan. 11, 2021 to shareholders of record Dec. 31, 2020. This hike marked the 35th consecutive year of a dividend increase for the company. McCormick’s dividend yield stands at 1.35%.
Jefferies analyst Robert Dickerson recently reiterated a Hold rating on the stock with a $190 price target (3.8% upside potential), saying that he remains sidelined given the stock’s current valuation relative to the bottom-line growth he expects over the next two years.
“MKC possesses products/brands that should be well-positioned to succeed vs. total center-store food and potentially keep taking share of category,” Dickerson commented in a note to investors. “We’d simply rather find a more attractive entry point.” (See MKC stock analysis on TipRanks)
The rest of the Street is cautiously optimistic on the stock, with a Moderate Buy analyst consensus based on 2 Buys and 2 Holds. With shares up 9.4% year-to-date, the average price target stands at $197.50 and reflects an upside potential of about 6.4% over coming 12 months.
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