The maker of cereal brands like Cheerios and Lucky Charms said Friday it will buy natural pet food company Blue Buffalo (BUFF) for $8 billion. Amid the humanization of pets, Blue Buffalo has prospered big-time.
Over the past three years, Blue Buffalo has delivered compound annual net sales growth of 12% and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) growth of 18%.
It is a bold/transformative move & raises the stakes for the new CEO, Jeff Harmening -- we have long loved the pet category & Blue Buffalo is a leading brand in the fastest growing sub-segment," said Jefferies analyst Akshay Jagdale. "As such, we like the strategic merit but the price is steep and General Mills will have to work hard to extract value from the deal."
For General Mills, the purchase is in keeping with its diversification efforts beyond slow growth packaged food.
General Mills CEO Jeff Harmening reportedly told attendees at the CAGNY conference Tuesday that he will use M&A to "reshape" the company's portfolio. The aggressive tone comes after a wave of deals have descended on the packaged food space in recent months.
In December, slow growth candy king Hershey Co. (HSY - Get Report) said it would acquire Amplify Snack Brands Inc. (BETR) in a blockbuster $1.6 billion deal. Hershey's big buy will expand its portfolio further into the snacking aisle with Amplify's popular brands such as SkinnyPop and Tyrells chips brands.
TheStreet asked General Mills' Harmening about his appetite to do deals in December. Here is what he said:
I don't think our view on M&A has changed because of two deals. Hershey bought a popcorn maker, which is great. Campbell's obviously did something that appears to be more transformational with Snyder's-Lance. What I would say is that M&A is one part of our growth strategy. The other parts are competing effectively where we are. Another is accelerating in some key platforms. We get the right to do M&A by doing the first two things well.
We feel increasingly confident in our ability to execute M&A well because our base business is back on solid footing and we are back to executing. If you are going to be doing M&A, it feels better to be executing well on your base. Also, we have been able to grow prior acquisitions like Annie's and Epic. We have in fact accelerated our growth in Annie's.
We have the capacity to do deals. Our cash flow is good, it improved in the first half of the year. But we are going to stay disciplined. We aren't going to buy things just because somebody else is buying something. It has to be the right fit for us.