General Mills $1.35 billion proceeds overnighter not cheap but welcomed

By Ronda Fears

Nashville, Tenn., Oct. 22 - General Mills Inc. launched a $1.35 million proceeds zero-coupon convertible deal Tuesday that was described as not exactly cheap but one that a market starved for new paper was flocking toward.

The 20-year issue was talked to price for a yield-to-maturity of 1.75% to 2.0% with a 25% to 28% initial conversion premium. It was pricing after the close via joint lead managers Banc of America Securities and Morgan Stanley.

"It's not awful but it's not great," said a convertible trader at a hedge fund in New Jersey.

Sell-side analysts put the deal anywhere from 3% rich to 3% cheap.

The new deal was quoted "all over the place" in the gray market but at the close was last seen bid at 0.25 points over issue price. It had been seen below issue price to as high as 0.375 over.

The convertible also opened up a market for three-year credit default swaps on General Mills, according to a derivatives trader at Commerzbank Securities.

The three-year credit default swap was very active, the derivatives trader said, whereas there was not a market in that tenor before the new deal emerged. There hadn't been much action in the five-year credit default swap, either, the trader said, but the three-year credit default swap was trading off the fives.

The three-year credit default swap traded at 120 basis points over Libor, 126 basis points and 130 basis points, the trader said. That was slightly wider to right on top of the five-year credit default swap, which the trader said ended at 110/125 basis points.

General Mills' new convertibles is putable and callable after three years.

Deutsche Bank Securities Inc. convertible analysts noted in a valuation report on the new deal that General Mills' 10-year straight debt was trading at 80 basis points over Libor before the convertible was announced, as was the five-year credit default swap.

Using the spread of 80 basis points over Libor and 30% volatility, plus a 2.5% common dividend yield, the Deutsche analysts put the new deal 2.96% cheap.

Bear Stearns & Co. convertible analysts put the deal about 1% rich, using a credit spread of 180 basis points over Treasuries and 25% volatility.

Wachovia Securities, Inc. puts it 3.1% rich, using a spread of 150 basis points over Treasuries and 25% volatility, along with a 2.5% common dividend.

The Rule 144A issue, with a $150 million greenshoe, will be non-callable for three years, with puts in years three, five, 10 and 15.

There will be a contingent conversion trigger of 125% that declines to 115% at maturity.

There is a contingent payment trigger of 120% after hard call protection expires.

The only new bell or whistle in this deal is the company's plan to buy the three-year call options issued to Diageo plc last year in its $10.4 billion purchase of Pillsbury Co. to mitigate the dilution effect to its common stock.

But no one was really sure of how that would impact the convertible, if at all.

"I've never seen this done," said Barry Nelson, portfolio manager at Advent Capital Management and 30-year veteran in the convertible market.

"It's a curious twist, kind of an interesting twist that gives the deal the essence of an exchangeable," he added.

It suggests that General Mills management is either bullish on the stock or being cautious, he said.

General Mills said it would use proceeds to help refinance short-term debt taken on to buy Pillsbury.

Moody's on Oct. 10 cut General Mills' senior debt rating, noting it was taking longer than expected to cut debt and improve flexibility after the Pillsbury purchase.

General Mills shares ended down $2.60 to $41.25.

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