SAN FRANCISCO — Amid weak financial performance and deteriorating balance sheet strength, Standard & Poor’s Inc. has downgraded the long-term senior unsecured debt of General Mills, Inc. to BBB from BBB+.
The change followed the announcement by General Mills that it will acquire for $8 billion Blue Buffalo Pet Products Inc., Wilton, Conn.-based maker and marketer of premium pet food. S.&P. projected the transaction will close by the end of May 2018. General Mills said it would fund the acquisition with a combination of debt, cash on hand and about $1 billion of equity. The company’s leverage as a multiple of EBITDA is likely to increase to 4.5 from 3.2 for the period ended Nov. 26, 2017, S.&P. said.
To the S.&P. analysts, the prospect that General Mills will issue equity to fund the transaction indicates seriousness about restoring balance sheet strength. A freezing of the company’s dividend rate and the suspension of share repurchases also are encouraging, the ratings agency said.
“We place significant reliance on management's commitment to credit quality, and the understanding that the restoration of the financial profile would remain a high priority versus shareholder returns or additional, large debt-financed acquisitions to maintain the BBB ratings,” S.&P. said. “This is important because General Mills experienced weak operating performance in fiscal 2017, and the company continues to face declines in its yogurt business and unevenness in cereal.”
To sustain its BBB rating, General Mills will need to avoid “operational missteps” during its integration of Buffalo, S.&P. said. Key will be avoiding damage to the Buffalo brand as General Mills expands distribution of the pet food maker.
“The stable outlook reflects our belief that General Mills will focus on improving credit measures during the 12 to 24 months following the close of the transaction, including leverage below 4 times,” S.&P. said. “We expect General Mills to be able to effectively integrate Blue Buffalo and continue to grow the brand and gain market share at food, drug, and mass retailers.”
If General Mills fails to deleverage to below a debt multiple of 4 times EBITDA within two years, a downgrade could be forthcoming, S.&P. said.
“This could occur if the company demonstrates aggressive financial policies by not paying down a meaningful amount of debt as planned, but instead uses that cash for share repurchases or additional acquisitions that do not add sufficient EBITDA to offset,” S.&P. said. “We could also lower the ratings if the company is unable to continue to grow Blue Buffalo or the company's base business deteriorates and the company experiences market share losses in its key categories, potentially due to increased competition or poor execution — such that revenues drop and EBITDA margin contracts by more than 100 basis points.”
Similarly, repayment of debt at a faster-than-anticipated pace could prompt an upgrade, S.&P. said.
The highest ratings in the S.&P. “B” family, the agency said an obligation rated BBB “exhibits adequate protection parameters” but is more susceptible to “adverse economic conditions or changing circumstances” triggering a weakened capacity to meet financial commitment associated with the rated debt.
