On November 30, 2020, Private Equity firm L Catterton confirmed the successful sale of the popular Mexican hot sauce maker, Cholula Food Co to McCormick & Company (NYSE: MKC) for $800 million. With Cholula’s reported 2020E sales of $96 million and ~$32 million in EBITDA, the deal translates to ~8.3x revenue and ~25x EBITDA: an outsized outcome for L Catterton by any standard. L Catterton was able to realize 4x its investment in Cholula since buying the majority of the business in April 2019, according to an article published in Food Processing.
So, what made the deal so attractive to McCormick that they agreed to anti-up such a high multiple? Even more interesting, what was L Catterton able to accomplish in such a short time that would drive the value of Cholula to such stratospheric multiples?
According to L Catterton’s press release, the value-creation program over its nineteen-month ownership period was multi-faceted and included recruitment of industry-leading talent, operational improvements, and heavy investments in Cholula’s brand and marketing by increasing awareness and loyalty. L Catterton was able to increase household penetration by over 50% during its short ownership period.
According to Cholula CEO, Maura Mottolese, “L Catterton… vastly improved our commercial execution efforts, and pivoted our foodservice strategy to position Cholula for long-term growth and success. L Catterton was well-positioned to acquire and grow the Cholula business by virtue of its global footprint, including its presence and local team in Mexico.”
According to an interview with CNN, Mottolese outlined that 40% of consumers learn about Cholula through their in-dining experience at restaurants. At the onset of the pandemic, foodservice sales dropped dramatically, so the company needed a new strategy. It chose to focus on the co-branding of new menu items and new packaging. It also pivoted its retail grocery strategy with the introduction of a new 2-ounce bottle for consumers to sample, as they began cooking more at home.
L Catterton is no stranger to effectively growing middle-market CPG companies. With $20 billion of invested equity, L Catterton claims to be the largest and most experienced CPG-focused Private Equity Group in the world.
Although Cholula’s hot sauce recipe has been marketed and sold in Mexico for years, it was first introduced in the U.S. in 1989 and is now sold in over 20 countries. The product line is made with a unique blend of peppers combined with a secret blend of signature spices. Since the brand was first introduced into the U.S., it has been effectively marketed as “The Flavorful Fire” through sporting events such as snowboarding, football, baseball, and joint promos with restaurant chains such as Papa John's. In 2019, it launched “Tacopedia”, a series of interactive exhibits described as “an Instagrammable Amusement Park Disguised as a Pop-up Museum”.
According to Lawrence Kurzius, McCormick Chairman, President, and CEO, “McCormick has a history of creating value through acquisitions. We have a proven track record for achieving our plans and accelerating the performance of acquired brands. We plan to grow Cholula by optimizing category management and brand marketing, while also expanding channel penetration.”
In an investor presentation, McCormick outlined the following as the key drivers behind the acquisition:
- Accelerates McCormick’s global condiment platform and growth opportunities
- Strongly complements McCormick’s portfolio
- Capitalizes on the growing consumer interest in healthy and flavorful eating
- Broadens McCormick’s product offering to consumers and foodservice operators
- Meaningful margin accretion in Consumer and Flavor Solutions segments
- Hot sauce is an advantaged high growth category
- Leading Mexican hot sauce that is outpacing U.S. hot sauce category
- Beloved premium brand proudly made in Mexico
- High-quality ingredients in a 100-year-old recipe
- Asset light strategic third party manufacturing model
- Strength in retail and foodservice
- Strong margin profile
McCormick became intimately familiar with the trends impacting the hot sauce market through its acquisition of Frank’s RedHot Hot Sauce in 2017, as part of a $4.5 billion deal with RB Foods.
According to Statista, the hot sauce market in the U.S. is currently a $1.5 - $1.55 billion market and expected to grow to about $1.65 billion by 2022. Nielsen estimates that U.S. hot sauce sales have grown an average of 9.7% annually for the past four years.
Here’s the first take-home message… Outsized exit multiples are achievable through thoughtful positioning and strategy execution including:
- High-quality distinctive product line with growing sales and high margins
- Rising tide for a product category
- Brand marketing and management expertise
- Smart capital
- Strong fit with well-capitalized industry leader
The second take-home message… While it is unclear how much scale was driven by L Catterton’s investment during its ownership, this deal is an outstanding illustration of how private company owners can partner with Private Equity to become highly attractive, middle-market companies when they choose to partner with the right firm. Even more importantly, when owners roll equity through a PE recap, the rewards for a two-step exit plan can be truly outstanding!
Prepared by Eric Bosveld and Vijay Malhotra, B&A Corporate Advisors