GIS General Mills Inc

By Annie Gasparro and Cara Lombardo 

General Mills Inc., burdened with stagnant sales of cereal and yogurt, is paying around $8 billion for a pet-food business to help it generate revenue growth in the U.S.

The Minneapolis-based food conglomerate, which hasn't sold pet food since the 1960s, said Friday it plans to buy Blue Buffalo Pet Products Inc. as it looks for a piece of the rapidly expanding natural pet-food market.

General Mills Chief Executive Jeff Harmening said the deal accelerates his plan to diversify its business by buying faster-growing brands and offloading some of its lackluster ones. Last fiscal year, General Mills' sales fell 5.6% to $15.6 billion, as brands like Yoplait yogurt and Betty Crocker lost the attention of American consumers.

"The Blue Buffalo acquisition brings back the growth in the U.S. and growth on a consistent basis," Mr. Harmening said in an interview Friday.

The pet-food company was founded by Bill Bishop, its chief executive, and his family in 2002, inspired by their dog Blue who died of cancer.

Blue Buffalo is now the top natural pet-food brand in the U.S. and has been growing faster than rivals in the $30 billion U.S. pet-food segment, Mr. Harmening said. Its sales have risen by an average of 12% a year over the past three years to $1.3 billion in its latest fiscal year.

When it went public in 2015, Blue Buffalo's stock rose 36% on its first day of trading.

Mr. Harmening, who became CEO of General Mills in June, said he and Mr. Bishop signed the deal Thursday night over beer and chicken wings at a restaurant in Blue Buffalo's hometown of Wilton, Conn.

Under terms of the agreement, General Mills would pay $40 a share for Blue Buffalo, a premium of more than 17% over its Thursday closing price. It expects to complete the deal by May as Blue Buffalo's majority shareholders have already approved it. Shares in Blue Buffalo jumped 17% Friday, while General Mills shares dropped 4%.

Jefferies analyst Akshay Jagdale said the deal makes sense strategically, but "the price is steep, and General Mills will have to work to extract value from the deal."

Pet food and pet-care products have been a bright spot in grocery stores. Mainstay canned and packaged foods are struggling as Americans buy more natural food and high-end treats for their pets, just as they are for themselves.

"The humanization and premium-ization is what's driving the pet-food marketplace," said Mr. Bishop, who will retain the chief executive position after the deal.

As a result, food makers have invested in pet-food brands in recent years. Last year, Mars Inc. said it would pay $7.7 billion to buy veterinary and dog day-care company VCA Inc. J.M. Smucker Co. paid more than $3 billion in 2015 to buy Milk-Bone owner Big Heart, and Nestlé bought the maker of Purina pet food for more than $10 billion in 2001.

Smucker said its pet-food business, led by the all-natural brands, has been a growth driver for the company, with sales up 2% in the latest quarter.

"Pet food and snacks have now become the largest center-of-the-store category in the U.S. food and beverage market," said Smucker Chief Mark Smucker at a conference this week, adding that Smucker could potentially acquire more.

Industry executives say there is still room for expansion.

Only 10% of American households buy wholesome, natural pet food now, while 68% own pets, according to General Mills and the American Pet Products Association.

Pet foods labeled all-natural and grain-free -- especially those that use simple, whole ingredients like chicken, blueberries and sweet potatoes -- are growing faster than mainstream varieties.

For consumers, the shift is motivated less by scientific evidence and more by a desire to treat their pets like family.

The fancier products also have higher price tags, making them more profitable for the companies that sell them.

Blue Buffalo says its food uses higher-quality proteins, like chicken rather than poultry byproduct and that it doesn't "cut corners" by using corn like some of its competitors.

In 2014, rival Purina filed a legal complaint against Blue Buffalo, accusing it of making false advertising claims about what its products could do. Blue Buffalo countersued for defamation. The companies settled after two years, though the terms were confidential.

For General Mills, getting into pet food will be a return to its past. The company produced pet food as far back as the 1930s, when it sold dog food, and later it sold food for cats and birds too.

The deal marks the second-largest pet-food deal ever, according to Dealogic, and it's the first major one for Mr. Harmening, who took the CEO job at General Mills in June. He had gained acclaim in previous roles for spearheading the company's shift toward natural foods, namely through the 2014 acquisition of Annie's Homegrown.

General Mills says it plans to expand Blue Buffalo by selling it in more places, including convenience stores and big-box retailers, a strategy it says helped make Annie's successful.

But competition is rising, especially as retailers seek to promote their own premium pet products under store brands, said Sikich Investment Banking director Thomas Davenport. Commodity giant Cargill Inc. recently acquired Pro-Pet, an Ohio-based manufacturer of private label pet foods, to capitalize on the trend.

Write to Annie Gasparro at annie.gasparro@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

February 23, 2018 16:44 ET (21:44 GMT)

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