Fitch Rates General Mills' Proposed $1 Billion Sr. Unsecured Notes 'BBB+'

CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to General Mills, Inc.'s (General Mills) proposed $1 billion senior unsecured notes. The notes are expected to be issued in two tranches of fixed rate notes due in 2017 and 2019. General Mills plans to use the net proceeds to finance the approximately $820 million Annie's, Inc. acquisition announced on Sept. 8, 2014 and for general corporate purposes, which Fitch anticipates will include repaying a portion of the company's outstanding commercial paper (CP). General Mills' outstanding CP was $1.5 billion at Aug. 24, 2014.

The new notes contain a Change of Control Triggering Event. Upon the occurrence of both a Change of Control and rating downgrades to below investment grade, unless the company has exercised its right to redeem the notes, General Mills will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount plus accrued and unpaid interest to the date of repurchase. The notes will be issued under the company's indenture dated Feb. 1, 1996, as amended. The indenture contains limitations on liens and sale/leaseback transactions; however, there are no financial covenants.

A full list of ratings can be found at the end of this release.

KEY RATING DRIVERS

Acquisition Removes Rating Headroom: Fitch estimates that General Mills' fiscal 2015 leverage (total debt to operating EBITDA) will be at or near 3.0x pro forma for this acquisition. Leverage will be temporarily high for the rating and there is no longer headroom in the ratings for significant operating underperformance or other material acquisitions. Fitch has factored in the company's fiscal 2015 guidance which includes share repurchases resulting in at least a 3% net reduction in shares outstanding, which Fitch estimates as at least $1.0 billion. These share buybacks are likely to be partially debt financed. Fitch anticipates that leverage will be more in line with the rating level within 18 to 24 months, but is heavily reliant on EBITDA improvement. Consolidated total debt-to-operating EBITDA was 2.8x, operating EBITDA-to- interest expense was 10.6x and funds from operations (FFO) adjusted leverage was 4.0x for the latest 12 months ended August 24, 2014.

Financial Performance and Brands: General Mills' ratings incorporate the company's strong profitability, substantial internally generated liquidity, and leading market positions in key categories. The company maintains significant brand equity in major product categories including cereal, yogurt, ready-to-serve soup, and snacks. Margins are among the sector's top tier, which provides ample financial flexibility. Credit strengths are balanced with General Mills' high priority for returning cash to shareholders.

Significant FCF: General Mills' annual free cash flow (FCF; cash flow from operations less capital expenditures and dividends) averaged more than $800 million during the past six years and was almost $900 million in fiscal 2014. The company generally utilizes its FCF for share repurchases and has also used debt funding such as in fiscal 2014. While the company has historically shown discipline to pull back on share repurchases after significant acquisitions, Fitch is concerned about the lack of commitment to reduce near-term share repurchases in light of the debt financed acquisition of Annie's, particularly if the heightened leverage is combined with earnings weakness.

Benign Input Costs, Tough Operating Environment: Fiscal 2014 net sales and operating income growth came in below Fitch's expectations. Fiscal 2014 net sales increased almost 1% to $17.9 billion and adjusted operating segment income fell approximately 2% to $3.2 billion. Adjusted gross margins for the year fell 80 basis points to 35.4%, reflecting the business mix due to acquisitions and higher input costs, particularly for dairy. The company's supply chain input costs moderated from 10% in fiscal 2012 to 3% annually in fiscal 2013 and 4% fiscal 2014. The company's current guidance is for modest 3% input cost inflation in fiscal 2015. General Mills expects mid-single digit net sales and adjusted segment operating profit growth in fiscal 2015 on a constant currency basis. The company estimates that the 53rd week in fiscal 2015 will add approximately 2% to top line growth. Annie's approximately $200 million annual sales are not material to General Mills overall. However, Annie's is in the higher growth natural and organic category and will be a significant addition to the company's existing $330 million business which has brands such as Cascadian Farms, Muir Glen, LARABAR and Food Should Taste Good.

Ample Liquidity: General Mills had cash and cash equivalents of $841.2 million, of which $816 million was in foreign jurisdictions, and $2.7 billion of undrawn committed credit facilities at August 24, 2014 quarter end that support its CP program. The CP backup facilities consist of a $1 billion revolver expiring in May 2019 and a $1.7 billion revolver expiring in April 2017. Yoplait S.A.S. has a EUR200 million (approximately US$ 250 million) revolving credit facility expiring June 2019 that is consolidated, with approximately $200 million available at August 24, 2014. Total debt of $9.6 billion includes $251.5 million class A limited membership interests. Upcoming long-term debt maturities are substantial but manageable and consist primarily of $750 million due in fiscal 2015, $1 billion due in fiscal 2016 and $1 billion due in fiscal 2017. Fitch expects that General Mills is likely to refinance this debt.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

Since the company has engaged in a significant debt-financed acquisition combined with share repurchases, a negative rating action is likely if operating earnings and margins come under severe pressure, resulting in a sustained period of leverage greater than 3.0x and weakening FCF.

Future developments that may, individually or collectively, lead to a positive rating action include:

A ratings upgrade is unlikely in the near to intermediate term but could occur in the long term if the company commits to maintain leverage (total debt to operating EBITDA) in the low 2x range while generating FCF at historical average annual levels or higher. A commitment to refrain from large debt financed share repurchases or acquisitions would also support an upgrade.

Fitch currently rates General Mills' and its related entities as follows:

General Mills, Inc.

--Long-term Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured debt 'BBB+';

--Senior unsecured credit facilities 'BBB+';

--Short-term IDR 'F2';

--Commercial paper (CP) 'F2'.

General Mills Cereals LLC

--Long-term IDR 'BBB+';

--Class A limited membership interests 'BBB+'.

Yoplait S.A.S.

--Long-term IDR 'BBB+';

--Credit facility 'BBB+'

--Senior unsecured debt 'BBB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=897294

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Contacts

Fitch Ratings
Primary Analyst
Judi M. Rossetti, CPA/CFA
Senior Director
+1 312-368-2077
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Grace Barnett
Director
+1 212-908-0718
or
Committee Chairperson
Wesley E. Moultrie II, CPA
Managing Director
+1 312-368-3186
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Judi M. Rossetti, CPA/CFA
Senior Director
+1 312-368-2077
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Grace Barnett
Director
+1 212-908-0718
or
Committee Chairperson
Wesley E. Moultrie II, CPA
Managing Director
+1 312-368-3186
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com