Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Mustard. It's the new hot thing. McCormick & Company Inc. has just agreed to pay a scorching $4.2 billion for Reckitt Benckiser Group Plc's food business, home to brands including French's mustard and Frank's RedHot sauce.

On any conventional yardstick, Reckitt has secured a supersized price: seven times the unit's estimated sales and 25 times its forecast operating profit for 2017. That compares with less than one times sales and 16 times operating profit for food sector acquisitions in the last three years, according to data compiled by Bloomberg.

Scorching Multiples
On any conventional measure, Reckitt has secured a supersized price for its food arm
Source: Bloomberg

This was a scarce asset -- a collection of high-margin brands delivering good organic growth. When such rare morsels come up for sale, buyers are willing to stretch. This one came along only because Reckitt's strategy had shifted to infant nutrition. Hence an auction that also attracted Unilever NV and at least one other U.S. food group.

The flipside is that McCormick will need to take a very long-term view on the payback. It envisages annual cost savings of $50 million, most of them by 2020. These lower the operating profit multiple to a still eye-watering 19 times. Include the financial benefits from day one, and the return on invested capital would be only 4 percent. That's about half what McCormick should be targeting to make the deal worthwhile to shareholders.

Cutting the Mustard
McCormick's shares have gained about 4 percent so far this year
Source: Bloomberg

Fortunately, the company has a huge U.S. distribution network and can plausibly distribute more of the acquired brands than Reckitt ever could. Even with that probable revenue boost, it would be quite an achievement if McCormick could double returns here in, say, five years.

Unilever will be upset to have let this one go. But at least it hasn't overpaid. There's one more consolation. It already owns the Maille French mustard brand that dates back to 1747, whereas French's Mustard isn't French. To some palates it isn't mustard either.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Chris Hughes in London at

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