General Mills (GIS) is poised to enter the pet food industry thanks to recently announced plans to acquire pet food giant Blue Buffalo (BUFF).
The blockbuster announcement came as a surprise to many on Wall Street, but analysts weighing in on the announcement had pretty much nothing bad to say about the plans by GIS.
So what are the terms of the deal? It appears GIS will be shelling out around $8B in cash to buy the pet food company. GIS has made an offer price of $40 for BUFF, a premium north of 15% on the current trading value for the latter company. GIS said it intends to finance the acquisition with a mix of cash, debt and equity. Around $1B of the proposed $8B acquisition will be financed by the issuing of shares in GIS. This of course will cause some concerns among existing shareholders in General Mills. The worry for them will be the potential for dilution of their current shares. Consistent with this fear the shares of GIS were down a bit on trading on Friday. After opening at $52.30, shares in the food giant rose to a high of $53.43 before pulling back to a close of $52.98. The pullback and eventual close at that level represented a decline of 3.57% or $1.96.
Shares in BUFF on the other hand soared on news of the potential acquisition. After opening at $39.75, BUFF soared to a high of $40.08 before turning back a bit to close the day at $40. The strong trading for BUFF was a 17.23% increase, a sign perhaps that investors are feeling good about the acquisition which according to GIS, will close at the end of 2018.
GIS has moved to acquire BUFF for several reasons but the chief reason being zeroed in on by analysts is the growth potential of the pet food sector. In 2017 consumers shelled out $20B to pamper and care for their pets. The biggest segment of buyers were dog owners who accounted for $10B of the total spent on pet care in 2017 according to a Nielsen report.
Coming in on the heels of this potential acquisition by GIS is news that it too may be on the shopping list of at least one competitor. The backer of Kraft-Heinz, 3G Capital, is believed to be shopping for a new food industry target. 3G Capital is known for its hard-nosed approach to buying food industry companies so the many are speculating that GIS acquisition of BUFF was an attempt to at least stave off a hostile approach from 3G Capital. Whatever the case, GIS and BUFF are now fully on the radar of Wall Street which will no doubt watch the performance of both companies over the coming months.
It is unclear whether GIS will have to overcome any regulatory hurdles in acquiring BUFF. So far investors seemed to be looking ahead to a hassle-free acquisition.