By Aishwarya Venugopal
(Reuters) - Cheerios cereal maker General Mills Inc will buy Blue Buffalo Pet Products Inc for nearly $8 billion, foraying into a fast-growing pet food market to counter declining sales of processed foods.
The acquisition announced Friday is the latest by a major food company seeking to expand in the $30 billion U.S. pet food market while battling low demand for sugary, preservative-filled items.
"In pet food, as in human food, consumers are seeking more natural and premium products," General Mills Chief Executive Officer Jeff Harmening said in a statement.
General Mills, home to Chex cereal and Yoplait yogurt, will pay $40 per Blue Buffalo share, representing a premium of 17.2 percent to the pet food company's Thursday closing price.
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Blue Buffalo's shares were trading close to $40 on Friday morning, while General Mills' stock fell 3.3 percent.
"As such, we like the strategic merit but the price is steep and General Mills will have to work hard to extract value from the deal," Jefferies analyst Akshay Jagdale said.
Other companies betting on pet care include Mars, Cargill and Nestle.
Mars, which makes Pedigree and Whiskas, bought animal hospital firm VCA for $7.7 billion last year, while agriculture company Cargill snapped up pet food maker Pro-Pet. Nestle has called the industry a strategic high-growth area for investment.
U.S. retail pet food sales rose over three times as fast as the 1.2 percent growth in sales of packaged food last year, according to research firm Euromonitor.
Blue Buffalo, founded in 2002, rakes in more than $1 billion in yearly sales, benefiting from strong demand for its BLUE brand of dog and cat food made with whole meats, fruits and vegetables.
Wilton, Connecticut-based Blue Buffalo also led the U.S. pet care market in 2016 with a 6.1 percent share, Euromonitor said, up from zero just two years ago.
Separately on Friday, Blue Buffalo announced fourth-quarter earnings and a yearly forecast that both topped Wall Street expectations.
General Mills expects Blue Buffalo will help boost sales and add to its earnings within two years.
It will fund the acquisition with debt, cash on hand and about $1 billion in equity.
The company had been evaluating an acquisition in the pet care industry for a while, Harmening said on a call with analysts.
"The more we got into the trends in the category, the more we felt like it was coming into our wheelhouse," he said.
(Reporting by Aishwarya Venugopal and Siddharth Cavale in Bengaluru and Martinne Geller in London; Editing by Sai Sachin Ravikumar)
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
