Food makers like General Mills (GIS 0.30%) are always shifting their portfolios to keep aligned with current consumer trends. So it isn't shocking to see the company buying and selling businesses. However, every so often a big deal takes shape that requires some time to absorb. That is how investors should view the $8 billion Blue Buffalo deal that got General Mills into the pet food space. Now, some five years later, General Mills might just be ready for another big deal.
Focusing on top brands
In 2018, food maker General Mills bought its way into the pet food industry. However, it didn't just buy any pet food company. It bought the leading brand in the fast-growing "healthy" pet food niche. At the time, some market watchers thought management might have overspent on the deal.
Image source: Getty Images.
However, management was adamant that it was buying a growing brand and that over time the high price tag would pay off. The key here was that Blue Buffalo was only just beginning its move into the mass market space, where General Mills has a dominant position. General Mills was able to accelerate the process and swiftly grow the brand. It has turned out well overall, though it hasn't been an entirely smooth ride. More recently, the company has lacked the production capacity to supply market demand for key products. That, however, just speaks to the strength of the brand, and capacity additions are resolving the issue.
As Blue Buffalo has been absorbed into General Mills, the company has been streamlining its broader business. The goal is to sell off slower-growing brands so more attention can be paid to faster-growing fare, like Blue Buffalo. For example, the European yogurt business got the boot, and so did Hamburger Helper.
This is completely normal activity, but there's something about the Blue Buffalo deal that needs to be examined in a bit more detail.
Paying down debt
When General Mills bought Blue Buffalo, its debt-to-equity ratio, a measure of leverage, hit a peak of a little over 2.5 times. That was a historically elevated level for the company, and basically put additional large acquisitions on the back burner. In fact, the company made the decision to pause dividend increases so it could put even more cash toward shoring up its balance sheet.
GIS Debt to Equity Ratio data by YCharts
Today, around five years or so later, the debt-to-equity ratio is down to 1.1 times. That's a much healthier figure, and one that investors shouldn't ignore. That's doubly true when you consider the divestitures that have been made to streamline the company's portfolio, freeing up management to focus on other issues. That will most certainly mean paying more attention to existing brands, but it will also mean an increased focus on vetting potential acquisition candidates.
Remember, keeping up with consumer trends is normal for consumer staples companies. So this isn't some unusual change or shocking revelation. General Mills' balance sheet is simply back in strong enough shape to absorb another sizable deal. And given the success of the Blue Buffalo transaction, that's probably something investors should view positively.
No firm timeline for another acquisition
In fairness, it is impossible to predict acquisitions, so this isn't to suggest that something is imminent. In fact, management wouldn't tell you even if there were something about to happen. But shareholders should be prepared to hear about an acquisition that's bigger than a bolt-on deal, because General Mills is definitely in strong enough shape again to pull off a sizable transaction. And if, perhaps when, another big deal hits the market, the company's already-strong portfolio could get even more growth oriented.
