Company lands Blue Buffalo for $8 billion, as food makers seek
faster-growing brands
By Annie Gasparro and Cara Lombardo
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (February 24, 2018).
General Mills Inc., beset by 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 lackluster ones. Last
fiscal year, General Mills' sales fell 5.6% to $15.6 billion, as
brands in its lineup 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,
which died of cancer.
Blue Buffalo, now the top natural pet-food brand in the U.S.,
has been growing faster than rivals in the $30 billion U.S.
pet-food segment, Mr. Harmening said. Its annual sales have grown
on average by 12% over three years to $1.3 billion in its latest
fiscal year.
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% to its closing
price Thursday and double its offering price when the company went
public in 2015. Blue Buffalo's majority shareholders have already
approved the deal, which is expected to be completed by May. 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.
The fancier products come with higher price tags, making them
more profitable for the companies that sell them.
Food makers have been investing 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.
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. And
industry executives say there is still room for expansion.
Only 10% of American households buy natural pet food now, while
68% own pets, according to General Mills and the American Pet
Products Association.
For consumers, the shift is motivated less by scientific
evidence and more by a desire to treat their pets like family.
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; it later added food for cats and birds.
The deal for Blue Buffalo is the first major takeover for Mr.
Harmening as General Mills' chief. In previous roles at the
company, he won acclaim for spearheading a 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 24, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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