General Mills, Inc. and Blue Buffalo Pet Products, Inc. entered into a definitive agreement under which General Mills will acquire Blue Buffalo for approximately US$8 billion, or US$40 per share in cash.

Upon completion of the transaction, General Mills will operate Blue Buffalo as a new pet operating segment. General Mills expects to maintain Blue Buffalo's Wilton, Connecticut, USA headquarters and its Joplin, Missouri, USA and Richmond, Indiana, USA manufacturing and research and development facilities. Blue Buffalo's CEO, Billy Bishop, will continue to lead the business and report to Jeff Harmening, General Mills chairman and chief executive officer.

“Blue Buffalo saw one of the highest growth rates in recent years, due to its presence in the US market, and it has been bucking the natural trend," wrote Paul Flores, Euromonitor International’s head of pet care research, in a pet food industry analysis. "Speaking to pet parents and highlighting the freshness, naturalness and quality of its ingredients, the player currently ranks sixth at the global level."

Founded in 2002, Blue Buffalo makes natural pet 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. In 2017, Blue Buffalo began selling in mass market retail. BLUE has US$1.275 billion in net sales and US$319 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal year 2017, representing an adjusted EBITDA margin of 25 percent.  The all-cash purchase price of US$40 per share represents a 23 percent premium to Blue Buffalo's 60-day volume weighted average price.

Over the past three years, Blue Buffalo has delivered compound annual net sales growth of 12 percent and adjusted EBITDA growth of 18 percent.

General Mills reasons for Blue Buffalo acquisition

According to a press release from General Mills, one reason for the acquisitions was that Blue Buffalo has built a loyal consumer base, particularly among millennials. General Mills believes Blue Buffalo is well positioned to capitalize on the pet humanization and the pet food premiumization trends, which are poised to continue for the foreseeable future. BLUE feeds approximately 3 percent of pets in the US, leaving potential for growth.

Another reason General Mills gave was that Blue Buffalo does well in e-commerce, where the company generated more than US$250 million of net revenues in 2017 growing over 75 percent versus prior year.

General Mills expects the acquisition of Blue Buffalo to create US$50 million in anticipated cost savings opportunities.

Quotes from General Mills and Blue Buffalo on acquisition

"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 Harmening, in a press release. “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, Blue Buffalo chief executive officer in a press release. "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. This transaction creates significant, immediate value for our shareholders, as it recognizes the strength of our competitively advantaged business model."

Recent Blue Buffalo news

Blue Buffalo plans to purchase more land near the pet food company’s Heartland Pet Food manufacturing and R&D plant located in Richmond, Indiana, USA, reported the Palladium-Item on January 9. Blue Buffalo agreed to pay US$267,974 for the land.

After beginning sales at four retailers, Target, Kroger, Publix and Meijer, in August, Blue Buffalo has already overtaken other natural pet foods in the food, drug and mass market (FDM) retail sector, CEO Billy Bishop said in Blue Buffalo’s third quarter earnings call on November 7. Despite this, Blue Buffalo hasn’t quite met expected market share goals in all retailers.

E-commerce pet food sales drove Blue Buffalo’s growth in the second quarter (Q2) of 2017, CEO Billy Bishop said during their earnings call on August 8. These online sales helped Blue Buffalo increase sell-through to pet owners by seven percent year-over-year for Q2, despite ongoing challenges at brick-and-mortar pet food specialty retailers. Sell-through is the ratio of the quantity of pet food sold by a retail outlet to the quantity it received wholesale.