BUFF Blue Buffalo Pet Products, Inc. (delisted)

By Annie Gasparro and Cara Lombardo 

General Mills Inc., afflicted with stagnant cereal and yogurt sales, is paying around $8 billion for a pet food business to 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 enhance the company's growth prospects by diversifying its business through acquisitions and divestitures of brands. 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.

Blue Buffalo, which had annual sales of $1.3 billion in its last fiscal year, has been growing faster than its rivals in the $30 billion U.S. pet food segment, Mr. Harmening said.

Under terms of the agreement, General Mills would pay $40 a share for Blue Buffalo, a more-than-17% premium over its Thursday closing price of $34.12. It expects to complete the deal by May. Shares in Blue Buffalo jumped 17% in early trading 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."

The pet food and pet-care industry has been a bright spot in grocery stores, where mainstays like canned and packaged foods are landing in fewer shopping carts. Americans are buying more natural food and high-end treats for their pets, just as they would for themselves.

"The humanization and premiumization is what's driving the pet food marketpalce," said Blue Buffalo Chief Billy Bishop in an interview Friday.

As a result, food makers have invested more 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," and remains one of the fastest-growing ones, said Smucker Chief Mark Smucker at a conference this week, adding that Smucker could also potentially acquire more brands in the space.

For General Mills, it will be a return to the past. The company produced pet food as far back as the 1930s, when it sold dog food through feed stores, and in the 1950s it marketed food for dogs, cats and birds.

Mr. Harmening said he and Mr. Bishop signed the deal Wednesday over beer and wings at a restaurant in Blue Buffalo's hometown of Wilton, Conn. General Mills would maintain those headquarters and Mr. Bishop would keep his position.

The deal marks the first major acquisition for Mr. Harmening, who took the job in June. Mr. Harmening had gained acclaim in previous roles for spearheading the company's shift toward natural foods, namely through the 2014 acquisition of Annie's Homegrown.

Blue Buffalo, which went public in 2015, was founded by Mr. Bishop and his family, as their dog Blue suffered several bouts of cancer at a young age. They wanted him to have food made with high-quality proteins like turkey and salmon. While Blue died of cancer, his legacy lives on through the company, which refers to him as the founder.

Mr. Bishop and his family own 8% of Blue Buffalo shares and stand to make about $625 million in market value from the deal, which has been approved by both the boards of General Mills and Blue Buffalo. The Bishop family and Blue Buffalo's largest shareholder, Invus Public Equities, have signed off on the deal, so it doesn't require additional signoff from other Blue Buffalo shareholders, General Mills said.

Mr. Harmening said his family is also a dog-loving group. He bought his dog Fox while working for General Mills in Switzerland, so the seven-year-old dog only responds to their commands when they say them in French.

Mr. Bishop, who had two dogs after Blue who have also since died, now has a cat named Bobby.

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

(END) Dow Jones Newswires

February 23, 2018 11:12 ET (16:12 GMT)

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