General Mills Pays Steep Price to Get Into High-Growth Business

Like many of its rivals in the food business, General Mills Inc., maker of Cheerios and Yoplait yogurt, has been in a funk. Sales are slumping as consumers change how they eat and shop.

So the 152-year-old food giant is buying a company that makes pet food, an industry where sales have been robust. With its $8 billion deal to buy Blue Buffalo Pet Products Inc., General Mills will be joining a host of consumer-product companies that have jumped into that market -- and other high-growth niches -- as a way to goose revenue.

“It reinforces that these companies see deals as a way to get out of the growth funk,” said Ken Shea, an analyst at Bloomberg Intelligence. For General Mills, “this is a sign that they have to take chances.”

While the $8 billion price tag is rich, the deal gives General Mills an especially big presence in the fast-growing premium pet food market. It’s surged 33 percent over the last five years as pet owners increasingly treat their dogs like members of the family, replete with pricey specialty diets. High-end foods now account for more than half the overall market, according to data from Euromonitor.

General Mills needs the boost. Sales have dropped for three straight years. Amazon.com’s push into the competitive grocery business has only added to the pressure on margins in the grocery aisle.

Flat Revenue

The deal could return General Mills to sales growth as soon as 2019. It expects to finish its current fiscal year, which ends in May, with flat revenue. Blue Buffalo, meanwhile, saw sales jump 11 percent last year. The company, which had focused on pet stores, has pushed into more mainstream retailers including Target and Kroger.

General Mills is actually late to the pet-food game. Nestle SA has said its Purina division is a central focus as the Swiss company divests slower-growing units like its U.S. confectionery business. In January, Cargill Inc. agreed to buy Pro-Pet, the maker of Black Gold dog food. Last year, Mars expanded its pet business, as the maker of M&Ms and Snickers agreed to buy the animal-hospital chain VCA Inc. for about $7.7 billion.

The competition will be fierce, but at least the category is growing, according to Asit Sharma, an analyst at the Motley Fool.

“If you’re going to muscle into a space against entrenched competition, it’s much easier to acquire share in an expanding market than a stagnant one,” Sharma said.

Share Price

Investors gave the acquisition a cool reaction. General Mills’s shares slipped as much as 6 percent to $51.66 on the news, the biggest intraday drop since September.

Some analysts were concerned by the $40 a share deal price. A surge of consolidation has driven up acquisition prices as the biggest companies look to snap up competitors.

Akshay Jagdale, an analyst at Jefferies LLC, said the price was “one of the richest transactions in the food space” -- putting Blue Buffalo’s valuation at an estimated 25 times earnings before interest, taxes, depreciation and amortization.

In 2017, the average multiple for food-and-beverage deals was 17.7 times Ebitda. That’s up 36 percent from the prior year and almost 50 percent more than the average dating back to 2010, according to Jagdale’s estimates.

On a conference call Friday morning, Chief Executive Officer Jeff Harmening, who took over last year, downplayed the risks of General Mills expanding into a new industry. He compared Blue Buffalo to the company’s Haagen Dazs ice cream brand, saying it’s a “premium brand in a big attractive category.” He added that producing and selling dog food is not that different from human food.

“A lot of the technologies are the same as we use here,” he said.

Now, pressure will be on General Mills to prove it can justify the high price of pushing into pet food.

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