Acquisitions

12 Months Ended

Nov. 30, 2021

ACQUISITIONS

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

Acquisition of FONA International, LLC

On December 30, 2020, we purchased FONA International, LLC and certain of its affiliates (FONA), a privately held company, for a purchase price of approximately $708.2 million, net of cash acquired. That purchase price includes the payment of $2.6 million during 2021 associated with the final working capital adjustment. FONA is a leading manufacturer of clean and natural flavors providing solutions for a diverse customer base across various applications for the food, beverage and nutritional markets. The acquisition of FONA expands the breadth of our flavor solutions segment into attractive categories, as well as extends our technology platform and strengthens our capabilities. The acquisition was funded with cash and commercial paper. At the time of the acquisition, annual sales of FONA were approximately $114 million. The results of FONA’s operations have been included in our financial statements as a component of our flavor solutions segment from the date of acquisition.

The purchase price of FONA was 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 independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management.

The final purchase price allocation for FONA resulted in the following fair value allocations, net of cash acquired (in millions):


Trade accounts receivable	$	12.4
Inventories	10.3
Goodwill	389.7
Intangible assets	266.0
Property, plant and equipment	36.3
Other assets	5.5
Trade accounts payable	(3.7)
Other accrued liabilities	(6.9)
Deferred taxes	(0.3)
Other long-term liabilities	(1.1)
Total	$	708.2

We determined the fair value of intangible assets using the following methodologies. We valued the acquired brand names and trademarks and intellectual property using the relief from royalty method, an income approach. We valued the acquired customer relationships using the excess earnings method, an income approach. Some of the more significant assumptions inherent in developing the 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 $1.4 million that was recognized in Cost of goods sold during 2021, as the related inventory was sold. Raw materials and packaging inventory were valued using the replacement cost approach.

The valuation of the acquired net assets of FONA includes $49.0 million allocated to indefinite-lived brand assets, $173.0 million allocated to customer relationships with an estimated useful life of 15 years and $44.0 million allocated to intellectual property with an estimated useful life of 12 years. As a result of the acquisition, we recognized a total of $389.7 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 customers for value-added flavor solutions, and our supply chain capabilities, as well as expected synergies from the combined operations and assembled workforce. Our aggregate income tax basis in the acquired intangible assets and goodwill approximates their aggregate book value at the acquisition date.

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 $801.2 million, net of cash acquired. That purchase price is also net of $1.5 million received during 2021 associated with the final working capital adjustment. 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 accelerates 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 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 independent valuations, discounted cash flow analyses, quoted market prices, and estimates made by management.

During 2021, we completed the Cholula purchase price allocation. The final purchase price allocation for Cholula resulted in the following fair value allocations, net of cash acquired (in millions):


Trade accounts receivable	$	15.0
Inventories	16.5
Goodwill	411.3
Intangible assets	401.0
Other assets	10.5
Trade accounts payable	(7.0)
Other accrued liabilities	(8.1)
Deferred taxes	(35.1)
Other long-term liabilities	(2.9)
Total	$	801.2

The 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 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 was recognized in cost of goods sold in 2021 as the related inventory was 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 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 an estimated useful life of 15 years. As a result of the acquisition, we recognized a total of $411.3 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.

Transaction and Integration Expenses Associated with the Cholula and FONA Acquisitions

The following are the Transaction and integration expenses recognized related to the Cholula and FONA acquisitions for the years ended November 30 (in millions):


	2021		2020
Transaction-related expenses included in cost of goods sold	$	6.3	$	—
Other transaction expenses	13.8		12.4
Integration expenses	15.2		—
Total transaction and integration expenses	$	35.3	$	12.4

We expect additional transaction and integration expenses related to our acquisition of Cholula and FONA to total approximately $3 million in 2022.