Acquisitions

12 Months Ended

Nov. 30, 2020

ACQUISITIONS

Acquisitions are part of our strategy to increase sales and profits.

Acquisition of Cholula Hot Sauce

On November 30, 2020, we completed the acquisition of the parent company of Cholula Hot Sauce® (Cholula) from L Catterton. The purchase price was approximately $803.0 million, net of cash acquired, subject to certain customary purchase price adjustments. The acquisition was funded with cash and short-term borrowings. Cholula, a premium Mexican hot sauce brand, is a strong addition to McCormick’s global branded flavor portfolio, which we believe broadens our offering in the high growth hot sauce category to consumers and foodservice operators and accelerate our condiment growth opportunities with a complementary authentic Mexican flavor hot sauce. At the time of the acquisition, annual sales of Cholula were approximately $96 million. The results of Cholula’s operations have been included in our financial statements as a component of our consumer and flavor solutions segments from the date of acquisition.

The purchase price of Cholula was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We estimated the fair values based on in-process independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management, a number of which are subject to finalization. The allocation of the purchase price will be finalized within the allowable measurement period. The preliminary allocation, net of cash acquired, of the fair value of the Cholula acquisition is summarized in the table below (in millions):


Trade accounts receivable	$	15.2
Inventories	16.5
Goodwill	410.5
Intangible assets	401.0
Other assets	12.5
Trade accounts payable	(6.8)
Other accrued liabilities	(7.4)
Deferred taxes	(35.6)
Other long-term liabilities	(2.9)
Total	$	803.0

The preliminary fair value of intangible assets was determined using income methodologies. We valued the acquired brand names and trademarks using the relief from royalty method, an income approach. For customer relationships, we used the distributor method, a variation of the excess earnings method that uses distributor-based inputs for margins and contributory asset charges. Some of the more significant assumptions inherent in developing the preliminary valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, operating profit margin, and working capital/contributory asset charges), royalty rates, the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.

We used carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items. We valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $4.9 million that will be recognized in cost of goods sold in 2021 as the related inventory is sold. Raw materials and packaging inventory was valued using the replacement cost approach.

Deferred income tax assets and liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases.

The preliminary valuation of the acquired net assets of Cholula includes $380.0 million allocated to indefinite-lived brand assets and $21.0 million allocated to definite-lived intangible assets with a weighted-average life of 15 years. As a result of the acquisition, we recognized a total of $410.5 million of goodwill. That goodwill primarily represents the intangible assets that do not qualify for separate recognition, such as the value of leveraging our brand building expertise, our insights in demand from consumer and flavor solutions customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. Our income tax basis in the acquired intangible assets and goodwill approximates $285 million. The final allocation of the fair value of the Cholula acquisition, including the allocation of goodwill to our reporting units, which are the consumer and flavor solutions segments, was not complete as of November 30, 2020, but will be finalized within the allowable measurement period.

We expect transaction and integration expenses related to our acquisition of Cholula to total approximately $35 million, of which $11.2 million of transaction expenses were incurred in 2020. We anticipate incurring the balance of those transaction and integration expenses in fiscal 2021. We incurred an additional $1.2 million of transaction and integration expenses in 2020 related to our acquisition of FONA International, LLC and certain of its affiliates. See footnote 19 for additional details.

The impact of Cholula on our 2020 consolidated income before taxes, was principally the effect of the previously noted transaction expenses, and an insignificant amount of interest expense.

Acquisition of RB Foods

On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division (RB Foods) from Reckitt Benckiser Group plc. The purchase price was approximately $4.21 billion. In December 2017, we paid $4.2 million associated with the final working capital adjustment.

Total transaction and integration expenses related to the RB Foods acquisition totaled $22.5 million in 2018, of which $0.3 million and $22.2 million represented transaction expenses and integration expenses, respectively.

Other Acquisitions

On September 21, 2018, we purchased the remaining 10% ownership interest in our Shanghai subsidiary for a cash payment of $12.7 million. In conjunction with our purchase of this remaining 10% minority interest, we have eliminated the minority interest in that subsidiary and recorded an adjustment of $12.4 million to retained earnings in our consolidated balance sheet. The $12.7 million payment is reflected in the financing activities section of our consolidated cash flow statement for 2018.