MACR CASE SUBMISSION -

3
GENERAL MILLS’ ACQUISITION OF PILLSBURY FROM

DIAGEO PLC
SUBMITTED BY: -
DHAIRYA AMIT DESAI – B19135
PRANAV BHATT – B19152
SHSHANK PANDEY – B19169
 Analysis &
Case Background Problems Identified Recommendation
Interpretation

The Acquirer – General Mills HQ – Minneapolis, Minnesota

FY 2000 2000s 2000s
Major Largest The firm’s segments
manufacturer & producer of of cereals, desserts,
marketer of baking and dinner-
consumer foods
Yoghurt and
mix as well as snack
with revenue of Second Largest products were in
$7.5 Bn and producer of mature stage and
Market Cap of $11 Breakfast offered low organic
Bn Cereals in US growth

• In 1990s, firm did aggressive share repurchases to increase its book value debt-to-equity
compared to the competitors
• Firm expanded in foreign territory through company owned businesses and JV with
Nestle and PepsiCo
 Analysis &
Case Background Problems Identified Recommendation
Interpretation

The Acquirer – Pillsbury (Diageo HQ – Minneapolis, Minnesota

PLC)
1997 Early 2000s 2000
Formed through the Pillsbury was
merger of GrandMet Diageo was
interested in acquired by
and Guinness. One of
the leading consumer-
GrandMet and
selling Pillsbury as operated
goods company with it wanted to focus
Product Portfolio of independently. It
mainly alcoholic on its beverage generated a revenue
beverages industry of $6.1 Bn in 2000

• Pillsbury’s major products constituted of refrigerated dough, baked goods, frozen pizzas
and other food products
• Diageo valued Pillsbury at $10.5 Billion
 Analysis &
Case Background Problems Identified Recommendation
Interpretation

Terms of Transaction

 Payment of Shares: General Mills would issue 141 Mn shares. After the transaction, Diageo
would own 33% of General Mills outstanding shares
 Assumption of Pillsbury Debts: General Mills agreed to assume the liabilities of Pillsbury at
closing, $5.142 Bn ( $142Mn in existing debt + $5 Bn in new borrowings)
 Contingent Payment by Diageo to General Mills: Establishment of Escrow Fund of $642Mn
which Diageo would pay out at 1 st anniversary
Avg daily share price(20 days)> $42.55
$642 Mn Payout

Avg daily share price< $38

Escrow Funds Payout by Diageo
$0.45 Mn Payout

$38 <Avg daily share price< $42.55

Payout= $642 Mn-[($42.55- Avg daily share price)*Total Price of o/s shares
held by Diageo]

Case Background
1. Should the company go
for Higher D/E Ratio ?
2a.Is the contingent
payment useful for the
seller ?
2b. What is the value of
contingent payment ?
3. Would the deal give Diageo
more control over General
Mills’
decisions?
4. Stakeholder’s Decision –
For/Against
Analysis &
Problems Identified Recommendation
Interpretation
• General Mills repurchased its share to increase the D/E Ratio compared to its
competitors. Was the practice sustainable for the firm in long run ?
• The company will have to suspend share repurchases to work down on large debt
load
• The contingent payment to General Mills would be useful for Diageo or not, given
the fact that shares of General Mills were undervalued and can increase after the
details of the deal are disclosed to the public
• What would be the cost of contingent payment to Diageo?
• Would it create value for Diageo or not?
• The deal seems lopsided as it would give 33% ownership rights to Diageo and also
help clearing the debts from accounts of Diageo
• Ultimately the decision of the merger lied in the hands of shareholders whether
General Mills should go ahead with the deal or not