Ladies and gentlemen, thank you for standing by. Welcome to the General Mills Investor Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Friday, February 23, 2018.
I would now like to turn the conference over to Jeff Siemon, VP, Investor Relations. Please go ahead, sir.
Thanks, Kathy, and good morning to everyone. Thank you for joining us on what we know is a busy day for many of you to discuss this morning's announcement of General Mills' acquisition of Blue Buffalo Pet Products. Before we jump in, let me touch on a couple of important points. If you're listening live, that probably means you've seen the press release we issued this morning announcing the transaction. And that press release and a copy of the slides that supplement the remarks this morning can be found on the General Mills Investor Relations website.
Blue Buffalo also issued a press release this morning announcing their Q4 results. You can find that release on their website at ir.bluebuffalo.com. And on that note, just to remind you, the purpose of this morning's call will be to focus on today's acquisition news. So we'll try to keep that the focus when we get to Q and A. In addition, I'll remind you that our remarks this morning will include forward looking statements that are based on management's current views and assumptions, and the second slide in our presentation lists factors that could cause future results to be different from our current estimates.
So with me this morning to discuss the transaction are Jeff Harmening, General Mills' Chairman and CEO Don Mulligan, our CFO and Billy Bishop, Co Founder and CEO of Blue Buffalo. And with that, I'll turn the call over to Jeff.
Thank you, Jeff, and thanks to everybody for joining us on such short notice this morning. Don and I are delighted to be here with Billy Bishop to talk about General Mills' acquisition of Blue Buffalo, and we're really excited for the growth that we intend to capture together. Earlier this week at CAGNY, I told you about General Mills' 3 keys to returning our business to consistent top line growth.
1st,
we are going to compete effectively on all of our brands across all of our markets. 2nd, we are going to and have started to accelerate our differential growth platforms, including Haagen Dazs, snack bars, Old El Paso and our natural and organic portfolio. And third, we are going to reshape our portfolio or grow through acquisitions and through divestitures. I'm very pleased to say that with the acquisition of Blue Buffalo, we are accelerating our portfolio shaping strategy by adding a high growth, mission driven 21st century brand that is leading the transformation of the pet food category. General Mills has almost 2 decades of experience nurturing and growing successful natural and organic brands.
And with Blue Buffalo, we have a terrific opportunity to leverage our capabilities and expertise to help them drive additional growth and create value for our shareholders. As you can see on Slide 3, we've agreed to acquire Blue Buffalo for $40 per share in an all cash deal, which represents an enterprise value of about $8,000,000,000 For those of you who aren't familiar with the business, Blue Buffalo is the leader in the attractive, fast growing, wholesomenatural pet food category. Under the leadership of Billy and his team, they have created a company with great scale and profitability. In fact, just this morning, Blue Buffalo reported their calendar 2017 results, including sales of nearly $1,300,000,000 and adjusted EBITDA margin of 25%, results that represent a continuation of their strong track record of top and bottom line growth. We very much look forward to welcoming Blue Buffalo to the General Mills family and to creating together a new pet operating segment, which Billy will lead.
Strategically, Blue Buffalo is a great fit for General Mills. I mentioned earlier our focus on reshaping our portfolio for growth. A key part of this is addressing businesses that are leaders in their space with the right scale and growth trajectory to make a meaningful impact on our business and where we can leverage our capabilities to continue to drive value. The acquisition of Blue Buffalo does just that by establishing General Mills as the leader in the large, growing and profitable wholesome natural pet food category. We believe that General Mills will be a great home for Blue Buffalo and that our experience growing brands like Annie's and Larabar and Epic and by leveraging our broad capabilities in sales and marketing and supply chain and R and D will help accelerate an already high performing growth business.
We also think the addition of Blue Buffalo will attract the attractive financial returns. The business will be immediately accretive to our net sales growth and we're adding a business with stronger operating margins than our current company average. By leveraging our capabilities, we expect to capture meaningful revenue synergies over time. For example, we see the wholesome natural category and Blue Pup Buffalo's business shifting toward the food, drug and mass channels, which plays to General Mills' strengths. And while we aren't planning to expand the Blue brand internationally in the short term, our global footprint should prove invaluable if and when we choose to do so.
We also see an opportunity to generate approximately $50,000,000 in cost synergies by leveraging our scale to drive efficiency while still protecting and investing behind the parts of the business that enable growth. As a result, we expect the transaction will be neutral to cash EPS in fiscal 2019 and accretive to cash EPS in fiscal 2020. Together, we're very excited about the tremendous value creation opportunity this combination represents. Slide 5 provides more detail on the impact of Blue Buffalo on General Mills' portfolio. This transaction has a new growth platform for our business with significant scale and attractive category trends both in the U.
S. And around the world. In addition, with about $1,300,000,000 in net sales, a track record of double digit top line growth and margins that are ahead of our company average Blue Buffalo will immediately enhance our net sales growth and operating profit margin. Slide 6 outlines why we think the U. S.
Pet food market is so attractive. First, it's one of the largest categories in the store with nearly $30,000,000,000 in annual U. S. Sales. But it's not only big, It's a consistent grower with retail sales increasing between 3% 4% in recent years and up at a 5% compound rate over the past 10 year time frame according to Euromonitor.
And the growth in the wholesome natural category where Blue Buffalo is exclusively positioned is even stronger. In fact, it's the fastest growing category within the broader pet food market. A lot of that has to do with the fact there's a great deal of emotional appeal in the industry. Pets are beloved members of the family and consumers want the best for them. In addition, consumers tend to stick with particular brands of pet food for the duration of their pet's life, creating a sticky subscription style repeat business with low private label penetration.
Compared to many other packaged goods, consumers are far more loyal to their brand of pet food, which plays the Blue's strength given its brand pull across all channels. The pet food market is also well established on e commerce platforms with many consumers taking advantage of subscription delivery services offered by the likes of Amazon, Chewy and other players. Blue Buffalo, in particular, has an incredibly strong e commerce business, which we'll share in more detail shortly. The consumer shift toward wholesome natural is transforming pet food in the U. S.
And we're still in the early innings of that transformation. In fact, the wholesome natural category has just 10% household penetration among U. S. Pet owners with considerable growth ahead. With the blue brand, General Mills is acquiring 1 of the largest pet food brands in the U.
S. And the number one brand in the wholesome natural category. In fact, Blue Buffalo is a full 4 times larger than the next competitor in this wholesome natural category. This leadership position is driven in part by strong presence across important channels. I mentioned that Blue Buffalo has a tremendous online presence.
They are the number one selling pet food brand online and the number one search pet food brand on Google. In addition, Blue Buffalo is a leader in the specialty channel and has strong momentum behind its recent launch into the food, drug and mass channel. Now let me turn it over to Billy Bishop, Blue Buffalo's CEO, to share with you how Blue Buffalo has built that leadership position and how we see General Mills enhancing Blue's growth strategy. So turn it over to you, Billy.
Thank you very much, Jeff. I'm excited
to be here today to talk about
the next phase in our evolution as part of the General Mills family. For those of you who are unfamiliar with Blue Buffalo, I founded this company with my father and brother, Chris, back in 2002 with a singular focus, to provide pets with the food that pet parents expect made from only the finest natural ingredients. Over the past 16 years, we believe that we've created a unique business and have established ourselves as a category leader with a clear purpose and brand identity. Our 1700 dedicated herd members or buffs as we call ourselves, listen to pet parents and are constantly innovating our products to meet their needs, never wavering from our true blue promise of always using high quality natural ingredients. And we're active in our philanthropic causes, raising awareness and funds for pet cancer research and service dogs for our veterans.
It all adds up to our mission, love them like family, feed them like family. Our powerful mission has translated into fantastic growth for the Buff. Since 2010, when we established ourselves as a national brand and began to reach critical mass, we've grown our business from just under $200,000,000 to nearly $1,300,000,000 in net sales and we've done it with a business model that is profitable and sustainable with adjusted EBITDA margins reaching 25% last year. As Jeff mentioned, 2017 was an important year for the company as we advanced our efforts to make Blue more available. We entered the FDM channel for the first time and we're off to a good start, having quickly established a number 1 or number 2 market share within the wholesome natural at our 4 largest SDM retailers.
We continue to believe SDM represents a considerable growth area for our business in the coming years. While we've been able to achieve considerable growth as a standalone company, we're even more excited about the potential we see to grow as a part of the General Mills family. Our 2 key priorities to grow market share in the U. S. And capitalizing on select international opportunities will greatly be enhanced by our ability to leverage General Mills' scale and capabilities in sales, marketing, advertising, supply chain, R and D and innovation.
Specifically, we're focused on growing our business with younger pets and younger pet parents, continuing to drive awareness and consideration with pet parents and influencers, making Blue products more broadly available and increasing our share in product types, where we do not have yet much penetration such as in wet foods and treats. Before I wrap it up and turn the call back to Jeff, I just want to reiterate how confident we are that we found the right partner in General Mills. As I've gotten to know their business and team throughout this process, I've been constantly impressed by their strong track record for accelerating growth in natural and organic brands, their purpose driven actions and their commitment to providing consumers with the highest quality products. I look forward to bringing our Buff family into the General Mills family and working together to continue growing the Blue brand for many years to come. Now back to you, Jeff.
Thanks, Billy. Let me share a bit about how we plan to incorporate Blue Buffalo into the General Mills family. As I noted earlier, we plan to operate Blue Buffalo as a new pet operating segment alongside our 4 existing segments of North American Retail, Convenience Stores and Foodservice, Europe and Australia, and Asia and Latin America. We plan to maintain Blue Buffalo's existing Wilton, Connecticut headquarters as well as its manufacturing facilities in Joplin, Missouri and Richmond, Indiana. And we are delighted that Billy will be staying with the company to lead the Pet segment reporting directly to me.
You've heard a lot today about why Blue Buffalo is great, and there are a number of reasons why we believe they will be even better as a part of General Mills. 1st and perhaps most importantly is that we've done this before. Our experience advancing fast growth emerging brands like Annie's, like Larabar, like Epic, helping them to expand their presence gives us confidence that our thoughtful approach to integration will enable us to do the same with Blue Buffalo. We'll focus on adding our capabilities where they're needed most, while also ensuring that we're not disrupting the key to Blue Buffalo's success, most notably their deep connection to pet parents and their pets. As we've demonstrated with Annie's and with many others, it is critical to us that we are good stewards of this fantastic brand.
As I mentioned earlier, we're looking forward to leveraging the best of both companies to drive greater growth and values for our shareholders. We see significant opportunity to grow the Blue Buffalo business by leveraging General Mills' deep customer relationships, our category management insights, our supply chain expertise and innovation skills among others. At the same time, it is clear that General Mills can benefit from Blue Buffalo's experience building authentic 21st century brand that resonates with millennials and consumers focused on premium natural products. And we look forward to learning from their experience building a leading brand in e commerce. And by leveraging the best of what each of us has to offer, I am confident that the ultimate result will be a stronger growth, profitability and value for General Mills shareholders.
Now I'd like to turn the call over to Don Mulligan to walk you through the financials of the deal.
Thanks, Jeff, and good morning, everyone. Let's turn to Slide 13 to review the transaction highlights. As Jeff mentioned upfront, the total consideration for the transaction will be $40 per share in cash, representing an enterprise value of approximately $8,000,000,000 This implies a 2017 adjusted EBITDA multiple of just under 22x, including synergies. We expect to drive significant incremental revenue synergies over time and are projecting annual run rate cost synergies of approximately $50,000,000 which we anticipate achieving within 24 months post closing. We expect these cost synergies to be driven primarily through greater scale in sourcing, manufacturing, logistics efficiencies as well as targeted SG and A reductions.
The transaction has been approved by the Board of Directors of both General Mills and Blue Buffalo and Invis and the Bishop family shareholders representing more than 50% of Blue Buffalo's outstanding shares have approved the transaction. As a result, no other approval by Blue Buffalo's Board or shareholders will be necessary to complete the transaction. We expect the transaction to close by the end of our fiscal 2018, subject to regulatory and other customary closing conditions. And as Jeff noted, we plan to maintain Blue's existing headquarters as well as its manufacturing and R and D facilities, and Billy will continue to lead Blue Buffalo. Slide 14 outlines the financial impact of the transaction.
As Jeff mentioned, the addition of Blue Buffalo will provide immediate benefits to General Mills' growth profile. More specifically, the addition of the Blue Buffalo will increase our organic net sales growth profile by 50 to 80 basis points and will enhance our adjusted operating profit growth profile by 80 to 100 basis points with growth accretion at the higher end of the ranges in the early years. We are planning to finance the transaction with a combination of debt, cash on hand and equity. We have a committed bridge facility in place from Goldman Sachs and expect to put permanent financing in place before closing, including approximately $1,000,000,000 in equity. We expect this transaction to be neutral to cash EPS in fiscal 'nineteen and accretive in fiscal 'twenty.
And following the completion of the transaction, General Mills' pro form a net debt to EBITDA ratio is expected to be approximately 4.2 times. And we're committed to maintaining a strong investment grade credit rating and expect to delever to approximately 3.5 times by the end of fiscal 2020. We plan to maintain our current quarterly dividend of $0.49 per share and we'll be suspending our share repurchase program while we prioritize achieving our leverage target. We expect to recommence share repurchases after delevering to more normalized levels. And we expect that our strengthened portfolio will further support long term growth in our dividend and share repurchase program over time.
Now let me turn it back to Jeff for some closing remarks.
So thanks, Don. Just to reiterate before we open it up for Q and A, we view this transaction as a meaningful step toward reshaping our portfolio to enhance our overall growth prospects. We're excited to be entering into the attractive and growing U. S. Pet food market with a leading position in Wholesome Natural, the fastest growing category within that market.
Most importantly, we believe we found an excellent partner in Blue Buffalo that understanding of our consumers across the business. We're looking forward to working together with Blue Buffalo, and we're confident that this acquisition will drive growth and value creation for our shareholders. So thank you again for joining us on short notice this morning. Let's open it up for questions. Operator, could you please go ahead?
Certainly. Thank And our first question comes from the line of just one moment please. Comes from the line of Andrew Lazar from Barclays Capital. Please proceed with your question.
Good morning, everybody.
Good morning, Andrew. Good morning, Andrew.
Congratulations. Quick quick question for me. I think a lot of us who follow Blue Buffalo certainly appreciate a lot of the distribution white space that's been starting to play out across the SDM channel as well as obviously the success in e commerce. If I compare that a little bit to, let's say, your acquisition of Annie's, there was a lot of distribution white space as well, of course. But you also had with Annie's a lot of opportunity, let's say, in to expand out beyond new categories, beyond where the Annie's brand had played previously.
And so maybe in a way might have seen a little less finite relative to the potential for what are clearly significant distribution gains with Blue. But I'm curious if you could just maybe compare those 2. I think there's a question around mills could have obviously gone through a broader or a deeper natural and organic human food kind of path and deepen your scale there as opposed to getting into a separate category around pet, which brings with a little bit more risk as a new category?
Well, Andrew, thanks for that. I mean, I think there are a couple of questions wrapped up in that. Let me start with the last one, which I think is maybe on somebody else, probably other people's minds as well, but this idea of entering a new category. I mean, first one of the things that's one of the things that excites us. I mean, when we have an opportunity to add our $8,000,000,000 brand the General Mills portfolio.
And as we enter this new category, we're doing so with the leadership team led by Billy and his family, but also many others who have been quite successful over time. And Billy is going to stay with the business, going to continue to run the business. And so we feel good about the leadership of that. In addition, it's a category that may be doing pet, but it's seeing a lot of the same consumer trends that we see in our human food businesses. And we feel great about our track record in natural and organic.
And frankly, this is a larger scale version of what we've done with Annie's and Larabar and Epic and others. And some of those were not in categories that we currently participated in even though they were human food. So we feel good about that. In addition, a lot of the underlying technologies for that they use are very similar to what we have here. So whether it's from an R and D standpoint or a manufacturing standpoint, the closer we got to this business, the more we realized how similar it was to things that we already do.
In terms of runway for growth, let me kick it off with a couple of comments and then if Billy has anything to add, we'll certainly let him take it because he is even more expert. But there is clearly a huge runway in the food, drug and mass channel. And having said that, Blue Buffalo is already a leader in the pet specialty, and that's a really important channel for them. And just like with Andy's and the whole the likes of Whole Foods and the organic channel, we've done very well there while expanding into food, drug and mass. And our intention would be to do very well in the specialty channel while expanding into food, drug and mass and e commerce.
And there's a tremendous amount of runway with that. But one of the things I like about Blue Buffalo is that in terms of how the brand behaves, it's actually fairly similar to Haagen Dazs and that it's a premium position product in a big, profitable, attractive category with lots of different avenues for freezers,
you
have stick bars. And so there are a number of ways to innovate. But you have many cups,
you have pints, you have it in shops, you have it in freezers, you have stick bars. And so there are a number of ways to innovate. And it seems to me that the same thing is true to Blue Buffalo and that the you can do it with treats, you can do it every day, you can do it with cats, you can do it with you can innovate with dogs, you can innovate in dry, you can innovate in wet. And so there are it feels to me like there are a lot of areas to innovate from a product standpoint and it feels to us like we have the technologies. But Bill, you may want to
comment on that further. Yes.
No, Jeff,
I couldn't agree with
you more and good morning, Andrew. I'm excited about this partnership guys and really how we, as Jeff mentioned, look at continuing to develop the Blue Buffalo brand. We have a master brand strategy as you guys are familiar with. We have 4 wholesome natural product lines under the master brand that we want to continue to develop, both within the specialty channels as well as in our new food, drug and mass channel. And I'm really excited about the innovation opportunities that we have.
We are definitely, as you guys are familiar with our products, providing products with ingredients that pet parents want to feed their pets. And I think that suits up perfectly with how General Mills has been providing foods that people love for their families. So I love the whole household opportunity that I think this combination is going to bring and we're really excited about the opportunity.
Thanks very much everybody.
Thanks Andrew. Thanks Andrew.
And our next question comes from the line of Steven Strycula with UBS. Please proceed with your question.
Hi, good morning and congratulations on the deal.
Good morning, Steve.
Good morning. Good morning. Thank you.
We appreciate the action
on a Friday morning at CAGNY. So it's good time. But so my question would be really quick. Question for Don. For the accretion analysis, can you help us understand what the if we take out the amortization or include the amortization expense, what the EPS accretion would be from a time line perspective in 2019 2020?
Thank you. And then I have a quick operational follow-up question.
Sure. We expect the purchase accounting amortization to be about $0.05 to $0.10 on EPS in fiscal 2019. It will drop to probably something under $0.05 in 2020 as some of the inventory write up rolls off. So we expect on an adjusted EPS basis that this acquisition will be accretive to our growth in F 'twenty. And so that's a sequencing, Steve, as you think about the adjusted EPS impact.
Perfect. That's helpful. And then question for Billy. Not so much in terms of deal price, but why was now the right time to partner with a larger corporate? And given you're a scarce asset in the space, how did you think about choosing the right partner, whether a pet parent versus a non pet parent?
Clearly, General Mills has good U. S. Distribution and a great sales force. I'm curious to hear your operational and strategic thoughts. Thank you.
Sure. Again, first off, we share very similar values from a company standpoint and to me that's at the heart of this transaction. And again, we have been driving this humanization and premiumization of pet products. So I think I'm excited about continuing to learn from General Mills and continuing to provide across all of our product lines the best wholesome natural products we possibly can in multiple forms. So I think it's going to be a great partnership And now is the right time for the BUFF, I think, to take it to the next level.
So we're really excited about this opportunity.
And our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, and congratulations to both of you.
Thank you, Rob.
I just wanted to know, Jeff, what can you do for Blue Buffalo with your resources in sales and marketing and distribution that Blue really couldn't do on its own. Can you give us a couple of examples that come to mind? And then secondly, what kind of learnings did you get from the Annie's integration? If I remember in the 1st year, there was some sales force execution issues, just trying to get the General Mills sales force used to selling Vianney's product in. And do I remember that correctly?
And what can you do to prevent that in this integration?
Yes. So Rob, let me take the second of that question first. I mean, look, we feel great about what we've been able to leverage with Annie's. And we think it's a fairly similar approach with Blue Buffalo, not exactly the same, but fairly similar is going to work. I will point out that with Annie's, they doubled their business in the 4 years that before we acquired them and we doubled again in the 3 years afterward, growing distribution by more than 80% and even 10% this last year.
So far from being something we're going to prevent, actually there's a great playbook there. We feel we've been really successful in how we've been able to expand into other channels. And what we can add, what General Mills can add versus that we're building on a team that's been wildly successful. And that feels good as opposed to building on something that's a fixer upper. I mean, this is not a fixer upper and neither is our North American retail business, by the way.
They're both going in the right direction. And we love the idea of building from areas of strength, which we're doing here. Specifically, I think there are a couple of things that we can add value on. One is that the Blue Buffalo has been phenomenally successful with their sales organization in the pet channel. And as they've entered FDM, we've been really impressed by their ability to execute.
As we look ahead, it's going to be have to be execution on a much larger scale in FDM and whether that's sales organization or supply chain, what have you. We've got 150 years selling into this channel. And so we think we can help augment what they've already done and help get them up to scale even faster. On the manufacturing side, they're getting a plant up and going and we've built a lot of plants over time. And so we like what we see with what they're doing with their plants, but we think we can help with that.
And finally, as we look at logistics and how we do logistics and sourcing, there's probably an opportunity as they scale. The food, drug and mass, again, we have a lot of experience in this area. We can augment what they're already doing well. And so as I think about it, there are number of areas where we can help them. And I guess the last would be innovation.
A lot of the technologies that we have in food are similar to what they have. And the more we've dug in, the more we've found those similarities. And again, it's not changing what they're doing because what they're doing has been successful. It really is augmenting it and accelerating it and that's really our goal.
Okay. Thank you.
And our next question comes from the line of David Driscoll with Citi Research. Please proceed with your question.
Great. Thank you and good morning everybody. Congratulations on the transaction to both sides.
Thanks, David. Thanks, David. Thank you.
Billy, well done on the 4th quarter and the 2018 Buff guidance. And I am delighted to hear that you're staying on with General Mills. So a couple of questions, if you guys don't mind. First one to Billy. Can you discuss the expectations for further FDM penetration in 2018?
18, how substantial is the expected expansion of distribution for the Buff products?
David, as you are familiar with our brand, again, we have 4 product lines under the Bluemaster brand. We are going to stick with our strategy to continue to bring in new accounts, somewhat of a selective basis, but we want to do it the right way as we've been talking about. So you will see our life protection formula line continue to expand into key FDM accounts and that's something that again you'll see us continue to execute throughout the course of 2018. So nothing is going to change there. As well as we're going to continue to build our businesses and support our product lines that are specialty exclusive.
So really no change at the end of the day, but again, I think we can learn a lot from this partnership and we'll take the best learnings and apply those where necessary.
Okay. And then a question to Jeff. Blue has a very unique and special marketing model inclusive of their pet detectives. This is something that's not very common in the food industry. Are you guys committed to maintaining Buff's marketing model?
And what synergies do you expect to come from this area out of the $50,000,000 if any?
Look, what Blue Buffalo has been able to do in store and pet detectives are a huge part of the whole package in store has been has really been sensational to see. So of course, we may we continue to maintain that. That's a it seems to us it's a competitive advantage on how Blue goes to market is how they market and how they market in store. And so I'm not sure there's a lot of value we can add with looking at Pet Detectives and how that works. Now there may be something we can learn.
And if there's something we can learn and apply the rest of our business, we are certainly willing to do that. In areas of synergy, when it comes to marketing, the only one that comes to mind for me is that they buy a lot of media, we buy even more media. And together, we might even be able to get better pricing on media. And so as I think about synergies, it would be more along the lines of that. The other synergy I can think of is not really a cost synergy, but it's a synergy, which is that we have a lot of capabilities through to drive individual outreach to consumers, because we have 3 of the 5 largest food websites in the United States.
And so we know consumers pretty well and it turns out that many of those consumers also have pets. And so to the extent that we can leverage our capabilities through the technology we use to target our current consumers, there's no reason why we wouldn't be able to do the same thing with Blue Buffalo. And it'd really be up to Billy and his team to take a look at the capabilities we have and take a look under the hood and see what can apply to their businesses. But I suspect they'll find some things there that will be useful to them. We know that Annie's did.
And they've maintained their equity and their approach. Annie's marketing model hasn't changed. But what they've done is they've augmented it with the capabilities that General Mills brings. And I think they found that and that's one of the reasons why we've generated improved growth.
John, a couple of little minor ones. Is there a breakup fee here on the deal, Number 1. Number 2, could you give us your estimate for the amortization step up? And then when do you think you'll get the equity offering in?
Yes. So all 3, yes, there's standard terms on the breakup, roughly 3% of price is on the breakup fee, so a little over $200,000,000 In terms of the step up in amortization, we expect that again in the 1st year to be about $0.05 to 0 point 10 dollars On an EPS basis, we expect that to fall to something less than $0.05 in the 2nd year. And we would be looking to do the equity offering as soon as we come out of blackout after Q3, so sometime in late March or through April. And again, we expect the deal to close before the fiscal year. So we'll have a you'll have a number of weeks to take care of the equity and the debt offerings.
Really appreciate the comments everybody. I'll pass it along. Thank you.
Thank you, David.
And our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning, folks.
Hi, Jason. Good morning, Jason.
Billy, congratulations. Exciting news. I've got 2 questions. First, quick housekeeping. Don, I think in response to Steve's question about all in EPS dilution, you gave some numbers that help contextualize 2019.
But your comment on 2020, you referred to accretive to growth, not accretive to EPS. Is it accretive to EPS in 2020 or is it just less dilutive?
It is it's less dilutive as the intangible amortization declines. So it's accretive to EPS growth. But as I said, we'll have about a $0.05 to $0.10 amortization hit in F 'nineteen and that will drop roughly in half to less than $0.05 in F 'twenty. So cash will be accretive in F 'twenty, but we'll still be carrying something less than 5% in the in amortization $0.05 excuse me, in amortization.
Got it. Thank you. That's helpful. And question for Billy. Billy, I haven't been following you as closely, but I've been following you from the sidelines with a bit of distance.
You probably get this question a lot, but I'd love to hear the answer. Mass is somewhat reminiscent of P and G's expansion of volumes into mass in what 2000, 2,000 and 1. Is that a reasonable case study to look at? Or is the market dynamic very different today? And maybe we've evolved to a point that looking at that type of history in terms of a proxy
for how performance could evolve over the next
couple of I'm not sure. I'd love your opinion and your perspective on that. Thank you. Thank you. I'm not sure.
I'd love your opinion, your perspective on that. Thank you.
Sure. I think it's a much different time and we've taken a much different approach to how we've entered into the FDM channel. So just to remind everybody, again, we have one blue master brand that we communicate to pet parents off of. We've taken a portion, if you will, of our life protection formula line, our largest product line and have brought some select products into the food, drug and mass channel. It is a little bit of a different channel than the specialty channel clearly from a product assortment standpoint.
But we feel that our life protection formula is the right product line at this time to start this new distribution channel for us. And we know that pet parents and FDM are looking for better for you products. People are bringing more organic and natural products into the food, drug and mass channel. And we feel that again our life protection formula line is the perfect Blue Buffalo product line to lead us down this expanded distribution path. It's much different than IAMS.
IAMS took their entire product portfolio and went to every store within the food, drug and mass channel. And again, that's very different from the approach that Blue is taking. So different times, but we love how pet parents are continuing to want to feed their dogs and cats wholesome natural products and we want to continue to be where pet parents are looking for those types of pet foods.
Got it. Thank you very much.
And our next question comes from the line of Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Hi, Chris. Good morning, Chris.
Hi. I left your presentation earlier this week feeling like either an emerging market acquisition was more likely than a U. S. Acquisition and certainly one with a global component. I realize there is a global component to this category.
But I'm just curious why a new category is appropriate for General Mills at this time? And is pet food something you've been targeting and maybe in your consumer work or work you've done on consumer insights? Is that something that General Mills has been targeting?
Yes. I think we've been evaluating this for a while. So I can assure you, Chris, we didn't wake up on Wednesday morning and decided to go in and depend. We've been looking at this for a while. So it's a good question, but it's something we've been evaluating.
And again, the more we got into the trends in the category, both the trends and the channel shift, but also the consumer trends, the more we felt like it was coming into our wheelhouse and the more we could feel we could add value. In terms of looking at the U. S. Versus outside the U. S, remember, we had our 3 strategies are really to compete everywhere, accelerate growth in select businesses and then reshape our portfolio for growth.
What you'll see is that on the accelerate piece, the platforms we're looking at, Haagen Dazs, Snack Bars, El Paso, National Organic, the majority of that acceleration will occur outside the U. S. So as we think about our portfolio outside the U. S, we should be able to accelerate growth more quickly based on those platforms. Now we still have snack bars in the U.
S, and we still have Old El Paso and Nashville Organic, but the growth should accelerate faster on those. So organically, we plan to grow more quickly outside the U. S, and we feel like we have a long runway, both in terms of expansion to new markets, but also expanding channels with the current markets we're in outside the U. S. Then on our portfolio shaping, the both through acquisitions and a little to some extent divestitures, we'll be more focused on the U.
S. Business, but not exclusively. And particularly what this does what this acquisition of Blue does for us in the U. S, it really makes our growth in the U. S, it brings us back to growth in the U.
S. And growth on a consistent basis. And so we think through this series of moves, what we'll be able to do is accelerate our growth organically outside the U. S. While accelerating our growth through portfolio shaping in the U.
S. And that no matter what the segment, our growth profile will increase and we'll be able to leverage our current capabilities as we do that.
Okay. And just a quick follow-up perhaps for Billy, but just you've moved into the FDM channels and done that rather cautiously or slowly. I'm just curious, what capabilities maybe you found you need that General Mills brings? And then what's determining what stores you go to, for example, as you build out kind of that the larger store base in the conventional channels?
Sure, Chris. We have a unique, we feel, go to market model that I think is powerful and really resonates with pet parents at the end of the day. So our approach has been to to communicate that as best we can to our FDM partners and see which ones that strategy lines up with best. And from there, then I think we're going to have the most impactful entry, if you will, for both our new retail customers and the BUFF. So that's just an approach that we think is the right one to take.
And again, we look forward to learning more from our new partnership with General Mills.
And if there's ways that
we can continue to build off of that, which I'm sure there are, you'll see us do that.
Okay. Thank you.
And our next question comes from the line of Pablo Zwaneck with SIG. Please proceed with your question.
Good morning, everyone, and congratulations to all of you. Thank you. Billy, a question for you. You've made it very clear to all of us that it was very important to you to find the right partner and General Mills is the right partner. Does that mean that there were other offers out there, but they were not entertained because this was the right partner?
And if you can give us some color in terms of how long discussions with I mean, when the discussions with General Mills start, that would help? And also related to that, why is $40 the right price for you, Billy? And then for Jeff, and again, congratulations obviously on the deal. This is a $1,300,000,000 sales company. Annie's was 200,000,000 dollars I could make the argument that Annie's was a lot closer to what you do than what Blue Buffalo does.
So how important is it for General Mills as part of this deal to be able to keep all the know how and talent that Blue Buffalo has? Because we've seen other pet food deals where that have been acquired, companies have been acquired that management ended up leaving. So how important was that as part of the transaction from a general mix perspective? Thank you.
Pablo, this is Jeff Siemon here. I was just going to say, we're not going to comment on kind of what the process was or how long the process was. But so I think we'll just kind of punt on that one, but I'll turn it over to Billy and Jeff for the other questions.
Yes, Pablo, again,
we truly love at the Buff about General Mills is their values and how they go about reaching their consumers, their customers at the end of the day. And we share a very similar approach. So better for you products, we take that whole healthy home, complete home view. We know that pets are family members, as you've heard me say multiple times, and we want to continue to do better for all family members, both non furry and furry. So I think for us, it's a great it's going to be a great partnership.
It's all based on similar values, which I think is again at the heart of what makes a great relationship. And we look forward to continuing to build the Blue brand under the General Mills family.
And your question about talent, Pablo, I think it's a really good one. It's an important one and a lot of people overlook that. But one of the we Billy is going to stay on with the new organization. He's going to report directly to me, and that's important. And having the he's got a very talented team and having them stay on and help us is going to be important as well.
What I would say is that one of the things I feel best about is that General Mills has a long track record of bringing people into the fold and bringing organizations into the fold and keeping the talent. And let me give you a couple of examples. We bought Larabar 10 years ago, and there's never been a single year we haven't grown Larabar at least double digits. And Larabar American actually still works with us on LoRa Bar. So that's 10 years later.
And I would say for Annie's, John Forker stayed for more than 3 years with Annie's running Annie's taking it from a public company and he was really instrumental in getting us going. Gene Kahn, when we bought Small Planet Foods with General Mills and not only led Small Planet Foods, but our sustainability efforts for many, many years after the acquisition. And on EPIC, which we bought a couple of years ago, Taylor and Katie are still running it. And they're having a great time, and we're really growing EPIC. And so I think talent is critical.
And one of the things that we feel good about, we've been able to incorporate talented people into General Mills from the outside over time through a lot of different acquisitions. And we see no reason why given the cultural fit we have with them and the talent they have why that wouldn't be the same here.
Great. Thank you and congratulations again.
Thank you.
And our next question comes from the line of Michael Lavery with Piper Jaffray. Please proceed with your question.
Thank you. Good morning. Good morning, Mike. As you look at the financing execution, can you just let us know what if any risk there is to any potentially changing accretion or do you have some things in place there? And then just a quick question for Billy.
Can you just touch on do you have a contractual period of time that you're meant to stay or is there anything specified about that?
Yes. On the Michael, on the financing, obviously, with the deal announcement today, we are starting to put hedges in place to protect on the interest rate side. And so we expect to be able to substantially mitigate that risk. Okay. Thank you.
And this is Michael. Again, the Bishop herd members are pumped about this new relationship. So we're going to we want to continue to paint all that white space out there blue. So my plan is to go after that.
Okay, great. Thank you very much.
Thanks, Michael.
And our next question comes from the line of Matthew Granger with Morgan Stanley. Please proceed with your question.
Thanks. Good morning and congratulations everyone. Just two questions on the channel outlook.
First, I guess, Jeff,
the FDM opportunity is obviously a key component of the rationale here and that's somewhere where mills can add a lot of value. But you made some comments earlier that sounded reasonably constructive on the Pet Specialty channel, which has been under pressure a bit more inconsistent. Just curious for your thoughts on the growth prospects in Pet Specialty and the risk of a more protracted slowdown there. Just any thoughts on what's embedded in your outlook for this business?
Let me give you a summary of kind of my remarks from earlier, then I'll turn it over to Billy, who's certainly the expert about the pet channel. My comments earlier were really, Matthew, toward that we felt good about our ability to drive a business across multiple channels. And we were successful in the natural and organic channel, both in terms of co ops and places like Whole Foods at the same time we moved into FDM. And the and so we felt good about our ability to do that. And we see the same sort of ability to be successful in specialty as we do in FDM and e commerce.
How much that grows, I'll probably let Billy talk about the outlook for the channel itself. But one of the things we've felt good about with Annie's and Epic and Larabar again are our ability to maintain good relationships across channels and to be able to be successful across different channels.
Yes. Just building off that Jeff's comments, the Pet Specialty channel truly is a special channel. Yes, they face some headwind. But again, when you look at products assortments, when you look at products and services, you can bring your dog into the pet specialty stores and have just a great interaction opportunity. So, yes, there's some headwinds, but we think again given our go to market model, we support each one of our retail partners and that's something that we're going to continue to do with our high touch go to market model through all of the media sources that the Buff deploys.
So again, I think specialty will find its rhythm and we want to be there and continue to be the leader within the Pet Specialty space and we're going to continue to drive that.
Okay, thanks. And then just lastly, I wanted to come back to international and just clarify sort of where that fits into thinking about the growth opportunity. I know Jeff, you said it's not priority number 1, but Billy, clearly it's been a focus of the company and it's something you still feel optimistic about. So I don't know if it's possible to give a sense of when you might be in a position to address that?
Sure, Matthew. This is Billy. I'll kick it off and then Jeff can fill in anything that he feels appropriate. But for us, I think you've I don't know if you have, but what I've been sharing with everybody is that we are taking a very, I would say, focused approach to the international market. We love the opportunity over $40,000,000,000 plus from a pet food market standpoint.
We're learning and have been learning for the last couple of years, and I think that's important. So we learn what part of the Blue go to market model works best in what particular country. So we really see this as a future growth opportunity. The key immediate focus for us, for Blue Buffalo and now I think as part of the General Mills family is how do we continue to build the business here in the U. S, where we really can, I think, leverage the brand equity to its fullest?
And there's a lot of white space here domestically that we feel should have our primary focus 1st and foremost. And then from there, I think we'll work together as a team to determine what are the best next international markets for us to enter.
Yes. One of the things that to build on what Billy just said, I mean, the pet category globally a big category. It's a profitable category. It's a growing category globally. So it's a great category globally.
But the journey of 1,000 miles begins with a single step. And the next step for us is to really be successful in FDM, while continuing to in e commerce and continue to play well in specialty channels here in the U. S. And to the extent we get to those other steps and are successful, we will certainly be willing to do that. But we want to take this step by step.
There's such a huge opportunity here in the U. S. I think that we see that one right in front of us.
Great. Thanks again.
And our next question comes from the line of Brian Spillane from Bank of America. Please proceed with your question.
Hey, good morning, everyone.
Good morning, Bryan.
I guess a question for Jeff and Don. Listening and just synthesizing this, it seems like a lot of the opportunity here is going to be in revenues and sort of revenue synergies as opposed to more cost synergies. So I'm kind of building out the acquisition model. It doesn't seem like you're at least in terms of what you're guiding for us, I know you haven't guided on revenues, just a meaningful acceleration in Blue Buffalo's revenues. So I guess my question is, A, is really the major point here is that there's a chance to accelerate revenues and B, in terms of the guidance you've given us, you haven't really layered in those revenue synergies into the accretion dilution estimates that you've given us?
Yes. Well, in terms of our expectations, Billy and team have done a terrific job growing the top line low double digits. We think with the step into FDM, there's an opportunity to not continue it, but in the near term, even strengthen that. And that's what our expectations are for the business.
I guess, but it doesn't appear that you've it doesn't appear right now, at least in terms of the estimates you've given us, that you're expecting it to accelerate beyond that. So I'm just trying to get a sense for whether that's kind of where the upside in this model would be versus the guidance you've given us?
Yes. I think that's a fair assessment. I think our ability, partnering with Billy's team, is to provide, frankly, a bit more certainty in terms of delivering against the FDM growth opportunity. Jeff had talked about our sales capabilities in that area, and we've been selling into that channel for a century plus. And so we think that there's opportunity for us to ensure success in that area.
And if you will, provide a bit more certainty in terms of the line of sight to that growth. Okay. So to the that's and so that's what we're banking on. If there is upside to the FDM, we will certainly go after it. And as Jeff alluded to, we really don't have anything significantly planned for international expansion.
So that may be an out year opportunity as
well. Thank you.
I think we have time for one more.
Certainly. And it comes from the line of Todd Duvink with Wells Fargo Securities. Please proceed with your question.
Good morning. Thank you. Hi, Todd. Don, I guess a quick question for you. You talked about reducing leverage to 3.5 times by the end of fiscal 2020, but you also talked about delevering to more normalized levels.
And if you take a look at your leverage over the last several years, it's been kind of high two times area. Is that what we should expect as the more normalized levels over time?
Yes. We want to get back to under 3. So that would be, yes, in the range of what I would call more normalized.
Okay. And do you have a time frame for that? Should we expect kind of after 2020, balanced financial policy, including some share buybacks and debt reduction both?
Yes. I think it's probably going to be a year or 2 beyond that. So if you go from the 3.5 down to something lower than 3, it's probably year or 2 out from 'twenty.
Okay. Thanks, everyone, for dialing in. I know it's a little bit crazy as I know a lot of folks are still out in Boca. We will I will make sure to try to get in touch with anyone that wasn't able to make it on the phone and have a chance to continue the conversation here. Thanks for your attention and have a great day.
Take care.
Thank you. Ladies and gentlemen, that does conclude the conference