When consumers think of General Mills (GIS 52.86, -2.09, -3.8%), they don't think of pet food. They will now, however.
Earlier today, General Mills announced its Board of Directors approved the acquisition of Blue Buffalo Pet Products (BUFF 39.88, +5.76, +16.9%) for $40.00 per share in cash, which represents an enterprise value of approximately $8 billion and a 17% premium over BUFF's closing price on Thursday.
Blue Buffalo is the industry leader in the U.S. Wholesome Natural pet food category with $1.275 billion in net sales in fiscal 2017 and a healthy adjusted EBITDA margin of 25%. That competitive position was appealing to General Mills, which is wading into the pet food business as part of a strategic effort to reshape its brand portfolio.
The company is going to create a new operating segment for the Pet business, which provides a complementary approach to providing an increased slate of natural and premium products for customers.
General Mills has been active in the latter regard, having become the third-largest natural and organic food producer in the U.S. behind brands such as Annie's, Larabar, and EPIC. With Blue Buffalo, it will own the leading brand making natural foods and treats for dogs and cats sold under the BLUE brand.
Blue Buffalo has done a commendable job growing its business, but tying up with General Mills will provide a bigger launchpad to grow its brand and share of the Wholesome Natural pet food market. At the same time, General Mills has a pathway now to disrupt, and capitalize, on a $30 billion U.S. pet food market.
This deal has already been approved by the Board of Directors of Blue Buffalo and it is expected to close by the end of General Mills' fiscal 2018.
General Mills anticipates this acquisition will be immediately accretive to its net sales growth and operating margin profile, neutral to cash EPS in fiscal 2019, and accretive to cash EPS in fiscal 2020.
The acquisition will be financed by a combination of debt, cash on hand and approximately $1.0 billion in equity. Bringing Blue Buffalo into the fold, though, will lift General Mill's pro forma net debt-to-EBITDA ratio to approximately 4.2x.
General Mills said it is committed to maintaining an investment grade rating, so it will aim to delever to approximately 3.5x by the end of fiscal 2020. To do so, General Mills will suspend its share repurchase program. The company added, however, that it expects to maintain its $0.49 per share quarterly dividend.