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    Why General Mills Is Paying Up for a Dog’s Breakfast

    Cereal and ice cream maker needs to shift to protein and is buying a natural pet food maker to do it

    General Mills is buying natural pet food maker Blue Buffalo Pet Products for around $8 billion.
    General Mills is buying natural pet food maker Blue Buffalo Pet Products for around $8 billion. Photo: Richard Drew/Associated Press
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    It isn’t just humans that are cutting carbs these days, their pets are too.

    That is why General Mills , GIS -3.59% maker of Cinnamon Toast Crunch and Häagen-Dazs, is willing to pay a high price for Blue Buffalo BUFF 17.23% Pet Products, a purveyor of high-protein, natural pet foods.

    Blue Buffalo’s ubiquitous television ads invoke dogs’ and cats’ carnivorous ancestors and belittle competing brands selling grain-heavy pet food. The pitch has worked. Blue Buffalo has grown sales by an average 12% a year over the past three years, General Mills said in a presentation on Friday.

    Why General Mills Is Paying Up for a Dog’s Breakfast

    Nonetheless, General Mills’ appetite for protein may have led it to overpay in this case. At an enterprise value of $8 billion, Blue Buffalo is going for 6.3 times 2017 sales, and 25 times earnings before interesting, taxes, depreciation and amortization.

    General Mills shares fell by 4% Friday morning. Standard & Poor’s promptly cut General Mills credit rating on the new debt it would be adding.

    Comparable pet food deals are scarce, but in 2015 J.M. Smucker paid around 2.5 times sales and 13 times Ebitda for Big Heart Pet Brands, maker of more traditional pet foods like Meow Mix. Recent deals for health-oriented human foods also suggest the valuation is aggressive. In 2016, Danone paid 3 times sales and 21 times Ebitda for WhiteWave Foods, maker of organic dairy, soy and almond milks.

    General Mills itself paid $820 million, or 3.4 times sales and a high 27 times Ebitda for organic macaroni and cheese maker Annie’s back in 2014. The company now hails that deal as a success. In a presentation to analysts earlier this week, General Mills Chief Executive Jeff Harmening said the company has grown Annie’s distribution by 80% and household penetration by 40%, though he didn’t give any specific sales data.

    But Annie’s was a smaller company that benefited from joining the General Mills grocery distribution platform. Blue Buffalo is still a growing brand for sure, but the brand is already well-established in customers’ minds. Growing it will require General Mills to master different distribution networks, and competitors can easily roll out similar products.

    Still, it is hard to blame General Mills and its peers for getting aggressive. Faced with rapidly changing consumer attitudes toward food, which now extend to their animal companions, old-line packaged-food companies must choose between acquisitions or continued decline. Target companies in attractive niches know this, which is why they demand high prices. The hunt will go on.

    Write to Aaron Back at aaron.back@wsj.com