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General Mills to Acquire Blue Buffalo: Will It Return to Growth?

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General Mills to acquire Blue Buffalo

Food manufacturers in the United States have been eyeing bolt-on acquisitions to reshape their portfolios. It’s happening amid low demand for their traditional products due to the consumer shift toward healthy foods. Large food corporations, including Kellogg (K), Hershey (HSY), McCormick (MKC), Campbell Soup (CPB), and Conagra Brands (CAG), went the M&A (mergers and acquisitions) route last year to expand into faster-growing avenues within the food segment and accelerate their top-line growth rates.

Following a similar growth path, General Mills (GIS) has announced the acquisition of Blue Buffalo Pet Products, a market leader in the wholesome natural pet food category in the United States.

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Deal details

General Mills has agreed to pay $40 per share for Blue Buffalo, reflecting a premium of about 17% to its closing price as of February 22, 2018, and representative of an enterprise value of $8 billion. The all-cash deal is expected to close by the end of its fiscal 2018 and be financed through a combination of debt, cash, and about $1 billion in equity.

The company’s foray into the pet segment took many by surprise since analysts were expecting a deal in the human food category. But entering the pet food segment could make sense since the category is witnessing strong demand and generating higher sales. It’s worth noting that one of the key reasons J.M. Smucker’s (SJM) top line is returning to growth is due to its improved performance in the pet food segment, driven by higher sales of dog food.

Although the deal seems like a strategic fit, many investors are raising their eyebrows over the price General Mills is paying to acquire the company, especially considering Blue Buffalo’s strong stock run in the past year. General Mills’ net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is expected to reach 4.2x following the deal, which some believe is a bit high. Following the announcement, General Mills stock fell 3.6% on Friday, February 23, 2018.

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