Deal Digest: McCormick (NYSE: MKC) Acquires Cholula

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The hot sauce industry has grown significantly in recent years due to increasing consumer interest in spicy flavoring and low-calorie options. This trend has been magnified by the COVID-19 pandemic, as the search for safe dining and financial stability has led consumers to cook at home, boosting demand for sauces and other condiments. McCormick looks to take advantage of this recent opportunity with its acquisition of The Cholula Food Company (“Cholula”), a leading hot sauce producer and distributor, from consumer-focused private equity firm L Catterton. The transaction grows McCormick’s share of the United States hot sauce market to 30%.

Why Cholula Was Sold 

L Catterton often holds portfolio companies over short time spans, with many investment horizons covering 1-4 years. The firm made the acquisition in April of 2019 with the goal of solidifying Cholula as a standalone enterprise, while capitalizing on the growing popularity of hot sauce. L Catterton pursued its objectives by investing heavily in the condiment’s brand, expanding Cholula’s household penetration by over 50% and growing sales to an estimated $96 million. In addition, the firm recruited new leadership in CEO Maura Mottolese, an industry veteran who most recently led Tate’s Bake Shop, a dessert and treats leader, to triple in size. After a brief holding period of under 2 years, L Catterton received an opportunity to achieve favorable returns and exit its investment in Cholula.  Cholula sees benefit in the deal as well, hoping the scale and deep expertise of its new parent company will allow it to continue its recent streak of growth. “With McCormick’s extensive experience and unique insight into the hot sauce category, we look forward to capitalizing on new opportunities and reaching even greater heights together,” Mottolese said.

Why McCormick Bought

The COVID-19 pandemic pushed hot sauce demand to new heights with the popularity of cooking at home, a safer and less expensive alternative to dining out. The condiment’s sales were already rising at an annualized rate of 9.7% from 2016-2019, accelerating to 24.9% over the last 12 months. McCormick expands into an attractive industry and complements its existing hot sauce portfolio with its recent addition of Cholula; in 2017, the company purchased another significant industry player in Frank’s RedHot. McCormick extends its lead in the United States hot sauce industry, eclipsing competitors Tabasco and Huy Fong Foods (Siracha parent company). “Hot sauce is an attractive, high-growth category and, as an iconic premium brand, Cholula is outpacing category growth,” said McCormick President and CEO Lawrence Kurzius.

How the Deal Went Down 

McCormick enjoyed the growing popularity of at-home cooking last quarter, when it saw an 8% jump in sales. When November came, the seasoning giant decided to capitalize on this trend. McCormick purchased the parent company of Cholula on November 24th for $800 million, financed by a combination of cash-on-hand and commercial paper. The deal value reflects an estimated 8.3x revenue multiple, depicting both attractive sales in the hot sauce industry and the favorable market position achieved by McCormick through the acquisition. The transaction is expected to be completed by the end of the calendar year.

What’s Next for McCormick and Cholula 

McCormick is expected to continue its expansion into the condiment space, an initiative kicked off in 2017 with its purchase of Reckitt Benckiser’s food business, which included iconic brands such as French’s and Frank’s RedHot, for $4.2 billion. “We’re building a platform around condiments broadly and hot sauce is the fastest-growing component of that,” said Kurzius. Cholula, which has already experienced rapid growth in recent years, looks to enjoy its parent company’s vast capabilities in both e-commerce and distribution. In addition, McCormick has plans to expand Cholula’s restaurant business – a key avenue of growth for the hot sauce company, accounting for an estimated 40% of customer acquisitions.

What This Means for Middle Market Deals in the Sector 

The hot sauce industry can expect to experience a sharp uptick in consolidation and investment, due to the growing popularity of the condiment and the current industry condition. The condiment’s growing popularity during the COVID-19 pandemic provides incentive for strategic acquirers that can couple this recent success in a highly fragmented market in considering adopting a potential roll-up strategy. Incumbents such as Tabasco and Huy Fung Foods (owner of Siracha) may be further incentivized to pursue potential acquisitions, as McCormick attains a dominant market position with the addition of Cholula. As competition intensifies and industry sales continue to grow, hot sauce companies should continue to expect attractive valuations.

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