Blue Buffalo Pet Products (NASDAQ: BUFF) built its business on offering a different kind of pet food. The company focused on using natural, recognizable ingredients and marketed itself to an audience that valued that type of offering.
Essentially, the company targeted people who cared what they put into their own bodies and guessed correctly that they would want to treat their dogs and cats the same way. That turned out to be true making Blue Buffalo a success, which led to a deal for the upstart brand to be acquired by General Mills (NYSE:GIS).
General Mills and Blue Buffalo reached a deal on Feb. 23 for the pet food company to be acquired at $40 per share in cash, about an $8 billion deal. That was roughly a 17% premium on where Blue Buffalo shares were trading before the agreement became public.
"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 General Mills CEO Jeff Harmening in a press release.
The sale is expected to close by the end of 2018.
Shares In General Mills actually lost value after the Blue Buffalo deal was announced. That's largely due to fears that the company may have overpaid. The pet products company, of course, saw the opposite happen. After seeing its shares close at $33.98 to finish January, they jumped to $40.01 on the last day of trading in February, a 17% gain according to data provided by S&P Global Market Intelligence.
General Mills should be able to increase distribution for Blue Buffalo. It should also be able to gain some back-office cost efficiencies as is typical when a smaller brand is acquired by another player in the same space.
"We are competing more effectively in our existing categories by really listening to consumers and providing a variety of options that meet their needs," Harmening said. "In pet food, as in human food, consumers are seeking more natural and premium products and we have tremendous respect for how attentive Blue Buffalo has been to the needs of their consumers, pet parents and pets, as they have built their brand."
This is a smart play for General Mills. It gets market share and a trusted brand that would have been expensive and uncertain if it tried to build a similar product from scratch. Integrating a small brand built on integrity into a larger one is often a challenge, but eventually this should turn out to be a good purchase for the larger company.