General Mills Inc. agreed to acquire Blue Buffalo Pet Products Inc. for $40.00 per share, giving the target an enterprise value of approximately $8.0 billion.
General Mills expects to use a combination of debt, cash and approximately $1.0 billion in equity to finance the transaction.
The U.S. market for pet food currently stands at $30 billion and is generating consistent 3% to 4% growth, while the wholesome natural category registered double-digit growth in each of the last three years, a General Mills release said.
Blue Buffalo CEO Billy Bishop will lead the Pet segment which will be created under the General Mills' umbrella when the deal closes, reporting to General Mills' Chairman and CEO Jeff Harmening.
In a statement, Harmening said the acquisition puts General Mills into 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."
The company anticipates $50 million in cost savings as a result of the transaction, along with meaningful revenue synergies. The deal will be immediately accretive to the company's net sales growth and operating margin, while being neutral to cash earnings per share in fiscal 2019 and accretive in fiscal 2020.
Blue Buffalo reported that its net sales rose 10.9% during 2017 to $1.27 billion from $1.15 billion in the previous year. Net income for the company jumped to $193.5 million during the year from $130.2 million in 2016. For 2018, Blue Buffalo is targeting net sales in the range of $1.40 billion to $1.43 billion.
The boards of both companies have approved the deal, which is expected to close by the end of General Mills' fiscal 2018, subject to customary closing conditions.
General Mills expects to maintain its quarterly dividend of 49 cents per share while suspending its current share repurchase program as it prioritizes to achieve its leverage target of 3.5x by the end of fiscal 2020. The company bought back 10.9 million of its shares for $600 million in the six months ended Nov. 26, 2017.
Goldman Sachs & Co. LLC acted as financial adviser to General Mills and Cleary Gottlieb Steen & Hamilton LLP acted as counsel.
J.P. Morgan Securities LLC and Centerview Partners LLC provided financial advice to Blue Buffalo. Simpson Thacher & Bartlett LLP counseled the target.