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)
Copyright (c) 2018 Dow Jones & Company, Inc.
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