Welcome to the Post Holdings discussion of rationale for its announced convertible preferred stock offering conference call and webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer, and Jeff A. Zadoks, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 P.M. Eastern Time. The dial-in number is 800-585-8367 and the passcode is 9454888. At this time, all participants have been placed in listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of Post Holdings for introductions. You may begin.
Good morning. Thank you for joining us today to discuss our rationale for our announced convertible preferred stock offering. With me today are Rob Vitale, our President and CEO, and Jeff A. Zadoks, our CFO. Rob will begin with prepared remarks. Afterwards, we'll have a brief question and answer session. Our press release supporting these remarks is posted on our website in both the Investor Relations and the SEC Filings sections at postholdings.com. In addition, the release is available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements.
As a reminder, this call is being recorded and an audio replay will be available on our website. With that, I will turn the call over to Rob.
Good morning. This call is in connection with our announced preferred issuance. This is a fairly modest tactical move. However, since we are offering the preferred under SEC Rule 144A, there cannot be a general market participation in the investor call. We wanted to provide you an opportunity to ask any questions and have them answered. That's really the only reason for the call. This will be a very brief call if there are no questions. First, the rationale. Based on our expected issue terms, the cash dividend rate of 4% to 4.5% will be below our 10-year pre-tax cost of money. It is perpetual capital having no requirement to be refinanced. We anticipate a 25%-30% conversion premium to our trading price, which makes the all-in cost of capital an attractive trade.
This would modestly dilute the common if we trade above the conversion price and if we have not, over time, seized the shares issued with opportunistic repurchases. The immediate use of funds is to retire a portion of our term debt, which expands capacity for other cash transactions, including cash acquisitions and opportunistic share repurchases. It also expands flexibility for structured transactions. To summarize, the issuance has negligible impact on our current cash flow, replaces a portion of our debt ladder with permanent capital, and expands our strategic capacity. With that, I'm happy to take any questions.
At this time, if you would like to ask an audio question, press star followed by the number one on your telephone keypad. Again, that is star one for questions. We will pause for just a moment. Your first question comes from the line of Chris Growe with Stifel.
Hi, good morning. There's always questions, Rob, thank you for taking those.
My goal was to get through prepared remarks faster than Jennifer got through the disclosure.
I think you got very close to that. That's great. A great goal there. Just two quick ones. What's the cost of your term debt today? I think about the cost of what you're paying down and then the cost of this capital that you're bringing in through the convertible preferred.
Our expectation is 4%-4.5%, and our current term debt is LIBOR plus 200.
Okay, got you. I just thought I would ask about, as I think about your balance sheet capacity today, it seems it's in pretty good shape here. You obviously could have some cash of sorts come in the door from the IPO of the nutrition division. In terms of expanding your strategic capacity, I think it was one of the items you mentioned, do you feel like you need that in the short run? Maybe the better question is, as you think about your acquisition pipeline here, is there a lot you see coming up that may require you to need capital in the relatively near future?
I would say the pipeline for cash M&A is growing. There's nothing immediate or we wouldn't be able to do something like this, but there's certainly opportunities around. I think the emphasis is on just making sure that we have the flexibility and capability to respond to whatever the opportunity may be, whether it's cash M&A, whether it's market volatility, whether it's additional structured transactions that require a bit more credit flexibility. What we don't want to do is be hamstrung for whatever comes down the pike.
Okay. Thank you. Just one, if I could just follow up with one question, would be on in terms of share repurchase activity. You said think about you have a certain amount of free cash flow you generate in a year, let's call it $500 million. In a perfect world or in a normal year, would that be roughly half share repurchase, half debt reduction? Is that the way to think about the free cash flow? This doesn't give you more capacity over and above that?
What we've communicated is a balanced approach to both, I think you have to think about balanced as over a longer period of time, not necessarily each quarter to quarter, as we try to balance opportunism on price versus opportunism on the ability to buy back bonds, which is how we have mostly deleveraged to date. We look at those and say, what this does is allows us to allocate more of our immediate free cash flow to share repurchase or M&A in the context of being in a less leveraged position.
Okay. Thank you so much.
Again, if you would like to ask an audio question, press star followed by the number one. Your next question is from the line of Tim Ramey with Pivotal Research Group.
Someone very smart once said, "If you have to choose between strategy and liquidity, choose liquidity." I'm not saying you're short on strategy here.
Liquidity.
Liquidity yet, either one. In fact, it's somewhat surprising with your debt to EBITDA near couple-year lows at this point. I guess my question, it's pretty self-evident, I suppose, what you're doing. My question is: Is this more about share repurchase and a way to finance that, or is this truly setting yourself up for strategic?
I would say all of the above. I think that it gives us the opportunity to be more aggressive, if we want to, on share buybacks. It gives us the opportunity, not necessarily more aggressive on price, but more aggressive on quantum of M&A. Under our credit agreement, it creates additional what they call Restricted Payment capacity, which is the barometer for allowing us to take additional structured transactions. What this does, and this is fairly tactical. Let's put it in context. I think in Chris's note, he pointed out it's $400-plus million off of a $7 billion market cap. This is, as I characterized in my comments, a tactical move, but it tactically expands our capacity to do strategic things.
Jeff, does it change your cash tax assumptions that you gave us last week?
Just marginally, because the interest that will be reduced by repaying our term loan is tax-deductible, and the dividend is not. $5 or $6 million is about all the change.
Okay, thanks.
Again, if you would like to ask an audio question, press star followed by the number 1. Your next question is from the line of Michael Lavery with Piper Sandler.
Good morning.
Good morning.
Just a quick follow-up, and sorry if I might have missed this, but can you give any sense of the amount of proceeds that are going to pay down the term loan?
From the preferred initially, the full balance of $400 million plus issue would go to pay down the term debt, and then that would reestablish debt capacity for whatever comes next.
Right. The proceeds go entirely to that, and then it's just the flexibility you get afterwards that is for repurchases or opportunistic M&A. That all gets done straight away, right away?
Yes.
Okay. Thank you very much.
Your next question comes from the line of William Reuter with Bank of America.
Hi. In the last question, you referenced that this is expanding your RP capacity. Can you, I guess, share what your RP capacity is currently under your most restrictive covenant?
It's about $2.2 billion.
Okay. I'm not sure if I've asked this recently, but if you have established a new leverage target in the context of all the transactions that have been occurring?
No, we haven't. We've talked the last 18 months or so being at five times, which is the position from which we think we balance effective return on equity with optionality, and that's where we will be just a tad below that after this transaction.
All right. That's all for me. Thank you.
There are no other questions at this time. I would like to turn the call back over to Rob for closing remarks.
That's it. Thanks, everybody. Appreciate you jumping on the phone with such short notice. Bye-bye.
This concludes today's conference call. You may now disconnect.