McCormick Is Acquiring Unilever's Food Business for $45 Billion. Will This Send the Spice Giant's Stock Soaring?
Key Points
McCormick is making a move to get even bigger in the center of the grocery store.
McCormick shareholders will own 35% of the new company.
Acquisitions are fraught with risks, but the strategic rationale here is clear.
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Two of the most dominant companies at the center of your local supermarket are combining.
McCormick (NYSE: MKC), which is best known for its spices but also owns a wide range of condiments including Frank's RedHot and Cholula hot sauces, as well as French's mustard, is pairing up with Unilever's (NYSE: (NYSE: UL) foods division, which is driven by Hellmann's and Knorr, which makes seasoning, soups, and bouillon cubes.
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McCormick shareholders will own 35% of the new company, while Unilever shareholders will own 35%, and Unilever, the company, will get 9%. Unilever Foods is being valued at an enterprise value of $44.8 billion, or 13.8 times 2025 adjusted EBITDA. That same multiple gave McCormick an enterprise value of $21 billion.
Investors balked at the news as the stock tumbled shortly after it broke, and McCormick closed Tuesday's session down 6.1%. However, there is a clear strategic rationale to the deal. Let's take a closer look at the pros and cons.
Image source: Getty Images.
Why the merger makes sense
Merging with Unilever Foods will only make McCormick more dominant in spices, seasonings, and condiments, strengthening its economies of scale, cross-selling opportunities, and allowing for cost cuts. Unilever will also contribute to McCormick's flavor solutions division, which develops custom seasonings and flavors for restaurants and sells directly to them as well.
McCormick argued that Unilever Foods' assets were "a highly complementary fit" for its brand portfolio. The move will also eliminate Unilever as a key competitor.
In the announcement, McCormick said the combined company expected to target a growth rate of 3%-5% in year 3, and cut about $600 million in annual costs. For year 3, it's targeting an operating margin of 23%-25%, up from 21% currently for the new company.
That all sounds bullish for the merger.
Why it might not create value
However, strategic rationale isn't enough for a merger to work on its own. The price also has to be right. With McCormick shareholders owning about one-third of the new company, that means Unilever Foods is being valued at twice as much, and that doesn't include the $15.7 billion in cash McCormick is paying.
Mergers are also fraught with culture clashes, integration challenges, and other such issues. Cutting $600 million in costs sounds good, but it might not be so easy to do without hurting parts of the business.
Large mergers also tend to be more unwieldy than smaller ones, and this is the largest such deal in the food industry in recent years.
The deal is expected to close by mid-2027. Expect McCormick to continue to make the case for the deal in the meantime.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends McCormick. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.
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