Fitch Rates General Mills' Proposed $750MM Sr. Unsecured Notes 'BBB+'

Fitch Ratings has assigned a 'BBB+' rating to General Mills, Inc.'s (General Mills) proposed $750 million senior unsecured notes. The notes are expected to be issued in two tranches - floating rate notes due in 2016 and fixed rate notes due in 2024.

General Mills plans to use the net proceeds for general corporate purposes, including repaying a portion of its outstanding commercial paper (CP). The company's outstanding CP was $952.5 million at Nov. 24, 2013.

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. The floating rate notes are not redeemable prior to maturity, and the fixed rate notes are redeemable at any time at the company's option.

KEY RATING DRIVERS:

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.

Flexibility for Moderate Discretionary Activities: Consolidated total debt-to-operating EBITDA was 2.5x for the latest 12-month (LTM) period ended Nov. 24, 2013, operating EBITDA-to-gross interest expense was 10.9x, and funds from operations adjusted leverage was 3.5x. The company's leverage remains adequate for the rating level following the primarily debt-financed $940 million acquisition of Yoki Alimentos S.A. (Yoki) in August 2012. Fitch anticipates that leverage may increase slightly within the rating category as the company engages in a higher level of partially debt financed share repurchases this year.

Fair Operating Environment to Benefit Fiscal 2014 Earnings: General Mills expects low single digit net sales growth on a constant currency basis, driven by innovation and new product news. Operating profit is expected to grow faster than sales, at a mid-single digit level, including contributions from acquisitions and productivity initiatives. Fitch believes these expectations are reasonable, but require stronger second half operating earnings growth versus flat results in the first fiscal half of 2014. The company's supply chain input costs have moderated from 10% in fiscal 2012 to approximately 3% annually in fiscal 2013 and fiscal 2014. This should result in a relatively stable pricing environment and approximately flat gross margin.

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 five years and Fitch expects it to remain above this level. The company's fiscal 2013 FCF was $1.4 billion and General Mills expects another year of strong cash flow in fiscal 2014. The company utilizes its FCF for share repurchases, but has shown the discipline to pull back after acquisitions. General Mills is engaging in significant returns to shareholders in fiscal 2014, including a 2% reduction in diluted shares and an annualized 15% dividend increase.

U.S. Yogurt Gaining Traction: General Mills' U.S. retail sales had been negatively affected by declines in core (regular and light) cups and under-representation in the fast-growing Greek yogurt segment. However, the company is slowly making enhancements, particularly with the successful launch of Yoplait Greek 100 in fiscal 2013, which achieved $150 million in first year net sales. Fiscal first half 2014 U.S. yogurt net sales were down 1%, which was a significant improvement from a 5% decline in fiscal 2013.

Ample Liquidity: The company maintains $2.7 billion of undrawn committed credit facilities that support its CP program, consisting of a $1 billion facility expiring in April 2015 and a $1.7 billion facility expiring in April 2017. Total debt of $8.9 billion at Nov. 24, 2013 includes $251.5 million class A limited membership interests. Upcoming debt maturities consist of $300 million 1.55% notes and $400 million floating rate notes due in May 2014, as well as $1.1 billion notes due in fiscal 2015. Fitch expects that General Mills is likely to refinance this debt.

RATING SENSITIVITIES:

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

A ratings upgrade could occur 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.

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

If the company engages in a significant debt-financed acquisition or share repurchase program, or operating earnings and margins come under severe pressure, resulting in a sustained period of leverage greater than 3.0x and weakening FCF.

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+'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (August 2013).

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=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815995

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Fitch Ratings
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