General Mills sheds light on inquiry; analysts urge settlement

by Melissa Alexander
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NEW YORK — General Mills, Inc. offered greater insight late Tuesday concerning the U.S. Securities and Exchange Commission’s investigation into its sales practices, while industry analysts urged the company to settle the case in a timely fashion.

In its quarterly filing with the SEC, General Mills detailed the concerns that prompted the agency to begin its investigation last October. At that time, some analysts surmised that the inquiry focused on the potential sale of the company’s stake in Diageo PLC, from which it purchased Pillsbury two years ago.

The SEC in early February filed notice that it would recommend civil action against General Mills. By then, allegations from a former General Mills manager indicated the investigation probably centered on so-called "trade loading," a commonly used sales practice in the packaged food industry.

Indeed, the quarterly filing last week confirmed that the SEC’s staff does not think the company adequately discloses the "practice of ‘loading’ at the end of fiscal quarters to help meet internal sales targets or the impact of such quarter-end ‘loading’ on current and future period results of operations."

The filing explained that the term "loading" refers to discounts or other promotional programs that encourage retailers and wholesalers to boost purchases of General Mills products.

In addition, the filing stated that the SEC thinks the company has "misstated" its policy on product returns.

The SEC’s February notice, called a Wells Notice, also covers actions by Stephen W. Sanger, the company’s chief executive, and James Lawrence, chief financial officer.

Sanger has repeatedly denied that he or the company engaged in any wrongdoing.

Tuesday's filing stated that "it is not possible to predict how long the investigation will continue or whether the SEC will bring any legal action against the company." Nevertheless, industry analysts suggested that the company negotiate a settlement with the agency to avoid restlessness on the part of investors and customers.

"If our reading is correct, the remedy appears to be some modest reshuffling/restatement of results," David Nelson, an industry analyst with Credit Suisse First Boston, wrote in a research report. "(That’s) not a big problem. The problem for investors is that this investigation continues to drag on.

"We note that the closure on the Pillsbury acquisition took a lengthy 16 months due to intransigence by General Mills with the Federal Trade Commission over rights to the Dough Boy icon — over which time the value of Pillsbury deteriorated.

"We hope management recognizes the value of a timely settlement. They should, considering all their options."

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