General Mills Acquires Blue Buffalo
General Mills, Inc. and Blue Buffalo Pet Products, Inc. entered into a definitive agreement under which General Mills will acquire Blue Buffalo for $40 per share in cash, representing an enterprise value of approximately $8 billion. The transaction establishes General Mills as a leader in the U.S. Wholesome Natural pet food category, the fastest growing portion of the overall pet food market, and accelerates its portfolio reshaping strategy.
Founded in 2002, Blue Buffalo is the fastest growing major pet food company making natural foods and treats for dogs and cats under the BLUE brand, which includes BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom and BLUE Natural Veterinary Diet. BLUE is the number one Wholesome Natural pet food brand in the U.S. with $1.275 billion in net sales and $319 million in Adjusted EBITDA for fiscal year 2017, representing an Adjusted EBITDA margin of 25 percent. Over the past three years, Blue Buffalo has delivered compound annual net sales growth of 12 percent and Adjusted EBITDA growth of 18 percent.
"The addition of BLUE to our family of well-loved brands provides General Mills with the leading position in the large and growing Wholesome Natural pet food category and represents a significant milestone as we reshape our portfolio to drive additional growth and value creation for our shareholders," said General Mills chairman and chief executive officer, Jeff Harmening.
"We are competing more effectively in our existing categories by really listening to consumers and providing a variety of options that meet their needs," Harmening continued. "In pet food, as in human food, consumers are seeking more natural and premium products and we have tremendous respect for how attentive Blue Buffalo has been to the needs of their consumers, pet parents and pets, as they have built their brand. As we have done with Annie's, Lärabar and EPIC, we expect to help Blue Buffalo by leveraging our extensive supply chain, R&D and sales and marketing resources. We will in turn benefit from their experience building one of the strongest pull brands in the CPG world."
"I have been impressed by General Mills' strong track record of accelerating growth for its natural and organic brands, while giving them the freedom to maintain their own unique culture and identity,” said Billy Bishop, CEO of Blue Buffalo. “General Mills will be a tremendous home for our BLUE brand as our talented team of over 1,700 'Buffs' joins this new extended family. From the first meeting Jeff and I had, I felt a strong cultural fit between our two companies and believe they will be a great partner in our mission to reach more pet parents and feed more pets. This transaction creates significant, immediate value for our shareholders, as it recognizes the strength of our competitively advantaged business model. Along with our leadership team, we look forward to working with General Mills to continue growing the BLUE brand for many years to come."
Compelling Strategic and Financial Benefits
Addition of Attractive Growth Category: The $30 billion U.S. pet food market is generating consistent 3-4 percent growth and is highly attractive for retailers based on continued market growth, premiumization and subscription-like purchase patterns that drive traffic and repeat purchases. Blue Buffalo is the leader in the fastest-growing Wholesome Natural category with double-digit growth over each of the last three years. The Wholesome Natural market represents approximately 10 percent of the pet food market in volume and approximately 20 percent in value. Based on the strong consumer tailwinds, the Wholesome Natural market is poised to continue to grow, propelling BLUE's growth.
Leading Brand with Loyal Consumer Base in Early Innings of its Growth: BLUE has one of the strongest brand equities in the pet food market and is the number one brand in the Wholesome Natural category with retail sales of four times the next largest Wholesome Natural pet food brand. Blue Buffalo has built a loyal consumer base, particularly amongst Millennials, and is well-positioned to capitalize on the pet humanization and the pet food premiumization trends, which are poised to continue for the foreseeable future. With all its success, BLUE still feeds only 3 percent of pets in the U.S. and has significant opportunities to convert more pets to BLUE.
Proven Success in Existing and Emerging Channels: BLUE is the number one pet food brand in the pet specialty channel at approximately twice the size of the next largest brand. BLUE is also the number one pet food brand in the rapidly growing E-Commerce channel, where Blue Buffalo generated over $250 million of net revenues in 2017 growing over 75 percent versus prior year. BLUE has generated early success in the food, drug and mass (FDM) channel which, in conjunction with General Mills' capabilities, represents a significant growth opportunity through strengthening BLUE's distribution.
Scaled Platform with Strong Growth and Operational Efficiency Poised to Benefit from the Transaction: General Mills' scale and decades of experience will support greater effectiveness and efficiency for Blue Buffalo across key business areas, including: sales, marketing, advertising, supply chain, R&D, innovation and environmental stewardship. These capabilities are expected to contribute to meaningful revenue synergies over time, in addition to $50 million in anticipated cost savings opportunities.
Meaningful Improvement to General Mills' Growth and Margin Profile: The transaction will be immediately accretive to General Mills net sales growth and operating margin profile, and is expected to be neutral to cash EPS in fiscal 2019 and accretive in fiscal 2020.
General Mills is the third largest natural and organic food producer in the U.S. with leading brands including Annie's, Lärabar, Liberté, Cascadian Farm, Muir Glen and EPIC. Upon completion of the transaction, General Mills will operate Blue Buffalo as a new Pet operating segment alongside its four current operating segments: North American Retail, Convenience Stores & Foodservice, Europe & Australia, and Asia & Latin America. General Mills expects to maintain Blue Buffalo's Wilton, Conn. headquarters and its Joplin, Mo. and Richmond, Ind. manufacturing and R&D facilities. Blue Buffalo's CEO, Billy Bishop, will continue to lead the business and report to Jeff Harmening.
The all-cash purchase price of $40.00 per share represents a 23 percent premium to Blue Buffalo's 60-day volume weighted average price (VWAP), and a 2017 Adjusted EBITDA multiple of approximately 22x, including synergies. General Mills expects to finance the transaction with a combination of debt, cash on hand and approximately $1.0 billion in equity.
Following the transaction, General Mills' pro forma net debt-to-EBITDA ratio is expected to be approximately 4.2x. General Mills is committed to maintaining an investment grade rating and expects to deleverage to approximately 3.5x by the end of fiscal 2020. General Mills expects to maintain its $0.49/share quarterly dividend and suspend its current share repurchase program while it prioritizes achieving its leverage target.
The transaction, which has been approved by the Boards of Directors of General Mills and Blue Buffalo, is subject to regulatory approvals and other customary closing conditions, and is expected to close by the end of General Mills' fiscal 2018. Invus, LP (Invus) and founding Bishop family shareholders, representing more than 50 percent of Blue Buffalo's outstanding shares, have approved the transaction and no other approval of Blue Buffalo's Board of Directors or shareholders is required to complete the transaction.