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S&P, Moody's downgrade General Mills on Blue Buffalo deal

Two rating agencies hit General Mills Inc. with downgrades after the U.S. food company agreed to acquire Blue Buffalo Pet Products Inc. for $8.0 billion.

S&P Global Ratings lowered all of General Mills' long-term ratings to BBB from BBB+, while Moody's downgraded the senior unsecured debt ratings two notches to Baa2 from A3. Both had stable outlooks on the ratings.

The rating agencies expect General Mills' financial leverage to significantly increase due to the transaction, which would be financed by the company through a combination of debt, cash and around $1.0 billion in equity.

"The downgrade reflects our belief that General Mills' pro forma credit protection measures will deteriorate following this acquisition and will remain weaker than our prior expectations for several years after the close of the transaction," S&P said.

General Mills' debt leverage would rise to about 4.5x, from 3.2x for the 12 months that ended Nov. 26, 2017, according to S&P. For its part, Moody's said the company should be able to trim leverage to below 4.0x within 24 months following the closing, in line with the Baa2 rating.

"We expect that General Mills will gradually reduce financial leverage through core operating cash flow, supported by its commitment to suspend dividend increases and share repurchases until credit metrics are restored, which will take at least two years," said Brian Weddington, senior credit officer at Moody's.

The acquisition is expected to close by the end of General Mills' fiscal 2018.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.