General Mills Buys A Growth Opportunity
With the purchase of narrow-moat Blue Buffalo, wide-moat General Mills is hoping to prop up sales, as top-line growth across the packaged foods landscape remains elusive.
Wide-moat General Mills (GIS) announced it will buy narrow-moat Blue Buffalo (BUFF), a natural pet food brand, for $8 billion, or $40 per share. We may slightly tick up our $61 fair value estimate for General Mills, and we have raised our valuation of Blue Buffalo to $39 per share from $28.50 to reflecting the discounted value of the offer, assuming a late May close. This implies an adjusted EBITDA multiple of around 22 times, including synergies, which we view as fair, given that Blue Buffalo boasts higher growth (compound annual sales growth of 12% over the past three years versus mid-single-digit declines at General Mills) and margins (operating margins in the mid-20s versus General Mills’ high teens). The transaction has already been approved by both boards; because Invus and the Bishop family control more than 50% of Blue Buffalo’s outstanding shares, additional shareholder approval won't be required to close. With the mid-single-digit decrease in shares following the announcement, we think General Mills is a touch undervalued.
The deal strikes us as strategically sound, as it stands to improve General Mills’ growth trajectory without compromising its ongoing efforts to enhance its bottom line. We expected the firm to look for inorganic growth opportunities, particularly in the natural and organic aisle, to prop up sales as top-line growth across the packaged foods landscape has remained elusive. While General Mills enjoys leading share in several domestic food categories, we’ve viewed its exposure to center store (which has faced declining traffic over the past several years as consumers opt for fresher alternatives in the perimeter) as a persistent headwind. As evidence, its cereal sales have averaged 3% declines the past three years, in line with the low- to mid-single-digit declines of the category, despite the company's 30% market share, with three of the top five brands in the U.S.
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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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