General Mills Hit With Downgrade After Blue Buffalo Deal

General Mills, Inc. GIS announced Friday that it was expanding into pet food with the $8-billion acquisition of Blue Buffalo Pet Products Inc BUFF.

Investors reacted to the news with a 3.6-percent sell-off and analysts were similarly unenthused.

The Rating

Societe Generale analyst Warren Ackerman downgraded General Mills from Hold to Sell and lowered the price target from $58 to $48.

The Thesis

Based on its recent acquisitions of both Annie’s organic brand and Blue Buffalo, General Mills is striving for relevance by both reformulating its portfolio and expanding to higher-growth categories, Ackerman said in a Monday note.

The latter strategy may prove costly.

“There is no doubt that Blue Buffalo has been a great story and we can see how Mills could add distribution muscle in the FDM [food, drug and mass] channel, but we struggle to see a decent payback,” he said. 

By Societe Generale's estimates, Blue Buffalo will add just 7 to 8 percent to General Mills group sales, with synergies of just 4 percent.

“It is a higher-growth and higher-margin business versus Mills, but will be EPS dilutive given [that] the company is raising $1 billion in equity to fund the deal,” Ackerman said. “The issue, in our view, is that it leaves little room for further M&A, involves execution risk and is very ROIC-dilutive.”

Price Action

General Mills shares were down 2.4 percent at $51.76 at the time of publication Monday.

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