THE DEAL (New York) -- Mars, the purveyor of Snickers and M&M's, expanded its pet food business on Wednesday with a deal to acquire Procter & Gamble's (PG - Get Report) pet food brands Iams, Eukanuba and Natura for $2.9 billion in cash.
The deal includes most, but not all, of Procter & Gamble's pet care business. Assets representing about 80% of Procter & Gamble's global pet care sales will change hands in the deal, including operations in North America, Latin America and other countries. Markets including the European Union are not part of the sale. The consumer giant said it plans to sell its pet-related assets in those markets separately.
Mars has an option to acquire pet-related businesses in several additional countries. The Cincinnati-based company said net proceeds from the transaction would be used for general corporate purposes.
The transaction is expected to be completed in the second-half of 2014, pending regulatory approval.
For Procter & Gamble, the deal continues an internal strategy to focus on personal care and home care, while shedding non-core and food-related assets. The company sold its Pringles chips business to Kellogg (K - Get Report) for about $2.7 billion in February 2012. A decade earlier, in 2001, Procter & Gamble sold the Jif and Crisco brands to J.M. Smucker (SJM - Get Report) for about $806 million. A source said Procter & Gamble would continue that internal focus.
"Exiting pet care is an important step in our strategy to focus P&G's portfolio on the core businesses where we can create the most value for consumers and shareowners. The transaction creates value for P&G shareowners, and we are confident that the business will thrive at Mars, a leading company in pet care," said P&G's chief executive A.G. Lafley in a statement.
Procter & Gamble's gradual exit from the pet food business represents a shift in strategy. As recently as 2010, the company continued to be active in adding pet-related businesses, buying organic pet food maker Natura Pet Products, which had annual revenue at the time of nearly $360 million.
Natura's stable of organic brands included Innova, EVO, California Natural, HealthWise, Mother Nature and Karma.
For McLean, Va.-based Mars, the deal adds to its existing roster of petcare brands that includes Pedigree, Royal Canin, Whiskas, Banfield, Nutro, Sheba, Dreamies, Cesar, and Pet Hospital.
The divestiture by Procter & Gamble is not the only pet care deal lined up for 2014. Blue Buffalo Co. is likely headed for an IPO, with an outside chance that the premium pet food business could be sold, according to one person with knowledge of the company's plans. In a public debut, Blue Buffalo could fetch a valuation up to two times revenues, or around $1.2 billion to $1.6 billion, more lucrative than what it might achieve in a sale, sources said.
Blue Buffalo had sales of about $352 million in 2011, and saw sales growth of more than 60% during the first half of 2012, compared with the same period a year before, according to Standard & Poor's. For all of 2012, S&P projected growth of more than 40% year over year and a growth rate of 20% in 2013. That would equate to revenues of roughly $590 million in 2013.
Blue Buffalo, in fact, is approaching the size of Nutro Products, which had revenues of about $900 million when it was acquired by Mars in 2007 for an undisclosed price, sources said.
There are a number of potential acquirers for a growing business in a growing sector, as Mars' deal for Procter & Gamble's pet food business proves.
Nestle SA has likely taken a look at Blue Buffalo, a source said. Mars, Colgate-Palmolive (CL - Get Report) and private equity-backed Big Heart Pet Brands, formerly known as Del Monte Foods Co., could be potential bidders.
Colgate owns Science Diet, while Nestle is parent to pet food giant Purina, which includes the Pro Plan brand. San Francisco-based Big Heart owns brands including Milk-Bone, Meow Mix, Natural Balance, Kibbles 'n Bits, 9Lives, Nature's Recipe and Pup-Peroni.
Big Heart, then known as Del Monte, acquired Natural Balance Pet Foods, a competitor to Blue Buffalo with $300 million in sales in late May. That purchase from private equity firm VMG Partners was for $500 million, a source said.