WSJ : French’s Mustard and Heinz Ketchup: Not the Perfect Mix

French’s Mustard and Heinz Ketchup: Not the Perfect Mix
Reckitt Benckiser has put its U.S. food business up for sale, but a bid from the obvious buyer — Kraft Heinz — would face major Obstacles.

French’s Foods is up for sale, and Kraft Heinz is on the hunt for acquisitions. But the respective U.S. mustard and ketchup leaders aren’t the perfect match they might sound.
Reckitt Benckiser RBGLY -1.07% on Monday announced a “strategic review” of its food business, which includes the French’s and Frank’s RedHot brands. The U.K.-listed consumer group is eager to raise cash, having announced the $17.9 billion acquisition of nutrition group Mead Johnson in February, and there isn’t much overlap between French’s and the rest of Reckitt’s operations, which center on hygiene brands such as Lysol and over-the-counter drugs.
French’s would be small change for Kraft Heinz, which withdrew a $143 billion offer for Reckitt’s peer Unilever after the Anglo-Dutch group mounted a more spirited defense of its stand-alone strategy than the U.S. condiments giant expected.

French’s made adjusted operating profit of £118 million ($148 million) last year, which would make the unit worth £2.2 billion if the food business changed hands at the same valuation multiple as shares in the wider Reckitt group. Unlike Unilever’s food business, French’s isn't noticeably underperforming: Organic growth of 5% last year was better than the group’s overall 3% rate.
But there are major obstacles to this speculated combination. One concerns antitrust issues: French’s and Heinz have started to compete for each other’s lunch over the past two years. French’s lost market share in mustard to a new product from Heinz in 2015, only to regain it last year; all the while it has focused on expanding its ketchup business. A private-equity buyer wouldn’t have to contend with the risk that regulators see a merger as a consumer-unfriendly stitch-up.
The other problem, perhaps counter-intuitively, is French’s high operating margin, which was close to 29% last year. Kraft Heinz, which has earned a reputation for aggressive cost-cutting since it came under the control of and Brazilian private-equity investor 3G, made a 27% adjusted operating margin over the same period. If the model is to buy and find savings, they need to get their teeth into a flabbier business.
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