Welcome to the Post Holdings Discussion of Rationale for its announced convertible preferred stock offering conference call and webcast. Hosting the call today from Host are Rob Vitale, President and Chief Executive Officer and Jeff Sadox, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12 p. M. Eastern Time.
The dial in number is 800-585 8367 and the passcode is 9,454,888. At this time, all participants have been placed in a 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, and 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 Sadduce, our CFO. Rob will begin with prepared remarks, and 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, and that's really the only reason for the call.
So 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 pretax cost of money. It is perpetual capital having no requirement to be refinanced. We anticipate a 25% to 30% conversion premium to our trading price, which makes the all in cost of capital an attractive trade.
This would modestly dilute the comment if we trade above the conversion price and if we have not, over time, feeds 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. So 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. So with that, happy to take any questions.
Your first question comes from the line of Chris Growe with Stifel.
Hi, good morning. There's always questions, Rob. So thank you for taking those.
My goal is to get through prepared remarks faster than Jennifer got through the disclosure.
I know you've got very close to that. That's great. A great goal there. Just two quick ones. So the what's the cost of
your term debt today?
As I think about the cost of what kind of what you're paying down and then the cost of this capital that you're bringing in through the capital deferred?
So the our expectation is 4 to 4.5 and our current term debt is LIBOR plus 200.
Okay, got you. And then 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 Active Nutrition division. In terms of expanding your strategic capacity, I think it's one of the items you mentioned. Do you feel like you need that in the short run? And maybe the better question is, is there 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 and 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 and 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 hand strung for whatever comes down the pike. Okay.
Thank you. And just one if
I could just follow-up one question would be on in terms of share repurchase activity. I used to think about you have a certain amount of free cash flow you generate in the year, it's called $500,000,000 And 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 and this is to then give you more capacity over and above that?
So what we've communicated is a balanced approach to both. And 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 today. So 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 and A in the context of being in a less leverage position.
Okay. Thank you so much.
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. So I'm not saying you're short on strategy here. Or liquidity. Or liquidity yet, either one. In fact, it's somewhat surprising with your debt to EBITDA near couple of 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 in a way to finance that?
Or is this
truly setting yourself up for strategic?
I would say all of the above. I think that we it gives us the opportunity to be more aggressive we want to on share buybacks. It gives us the opportunity more aggressive, not necessarily more aggressive on price, but more aggressive on quantum of M and A. And it creates additional 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. So what this does and this is fairly tactical, to put it in context, I think in Chris' note, he pointed out it's $400,000,000 plus off of $7,000,000,000 market cap.
So this is, as I characterized in my comments, a tactical move, but it tactically expands our capacity to do strategic things.
And Jeff, does it change your cash tax assumptions that you gave us last week?
This is marginally because the interest that will be reduced by repaying our term loan is tax deductible and the dividend is not. So $5,000,000 or $6,000,000 is about all the change. Okay. Thanks.
Your next question is from the line of Michael Lavery with Piper Jaffray.
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 debt that's the term loan?
Initially from the preferred initially, the full balance of $400,000,000 plus issue will go to pay down the term debt and then that would reestablish that capacity for whatever comes next.
Right. So the proceeds go entirely to that and then it's just the flexibility you get afterwards that is for repurchases or opportunistic M and A. And so 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. And the last question you referenced that this is expanding your RP capacity. Can you, I guess, share what your RFP capacity is currently under your most restrictive covenant?
It's about 2,200,000,000
dollars
Okay. And then, 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 5x, which is the position from which we think we balance effective return on equity with tad below that after this transaction.
All right. That's all from 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.
Thanks, everybody. Appreciate you jumping on the phone with such short notice. Bye bye.
This concludes today's conference call. You may now disconnect.