General Mills Acquisition of Pillsbury from Diageo PLC
This case discusses the acquisition and financial proposal of Pillsbury to General Mills from Diageo PLC. The deal involves three main parts:
1. Diageo receiving 141 million shares of General Mills stock. At the time the stock price was $38.
2. GM would assume $5 billion of Pillsbury’s debt.
These two points make the deal worth about $10 billion for Pillsbury if sold to General Mills.
3. The third and most interesting part is a contingent clause valued at up to $642 million
The contingent clause was created because originally Diageo wanted more for Pillsbury – $10.5 billion. GM didn't want to budge from $10 ...view middle of the document...
As such they may have been looking to offload there non-core entities such as Pillsbury.
SWOT Analysis for General Mills
Strength * Recognizable name brand * Investment grade bond rating | Weakness * Difficult times for domestic growth. Market saturation |
Opportunity * Pillsbury means a larger product portfolio domestically and internationally * With Pillsbury they could realize operational efficiencies in areas such as supply chain and marketing | Threats * Acquiring Pillsbury means assuming more debt could jeopardize bond rating * Diageo could control 33% of their company * Pillsbury deal means opportunity costs. Resources tied up in this acquisition for some time. Limits any new product lines or R&D opportunities. * Strong competition from companies like Kraft and Sara Lee |
SWOT Analysis for Diageo
Strength * Market leader in beverage industry * Strong financial position | Weakness * Burger King and Pillsbury have been a drag on earnings |
Opportunity * Pillsbury deal wipes $5 billion in debt off the books * Pillsbury sales means 33% ownership in GM and allows influence of management decisions | Threats * Pillsbury deal means opportunity costs. Resources tied up in acquisition for some time. Limits new product lines or R&D opportunities. * Selling Pillsbury means less diversification and more risk |
Growth and Synergies for GM and Pillsbury
Consummating this deal would essentially double the size of GM. Pillsbury revenues in fiscal year 2000 were $6.1 billion and GM's were $7.5 billion. This would allow GM to gain much needed shelf space in grocery aisles and give them opportunities to maximize advertising. By integrating the Pillsbury's product lines with existing operations, GM could take advantage of synergies in administrative and production areas such as supply chain costs. Overlapping functions such as marketing could be combined and opportunities for staff and resource reduction could save costs while maintaining high levels of productivity. GM will be handling a much larger volume of materials and products and cost reduction opportunities in the supply chain could prove very beneficial. GM could negotiate lower costs with their partners or threaten to switch to other low cost vendors.
Part of the agreement between General Mills and Diageo included a contingent payment. The terms of this payment specify that up to $642 million be paid to General Mills at the first anniversary of the deal closing, depending on the stock price. If the stock price is $42.55 or above, General Mills will receive the full $642 million. In this case, GM’s acquisition cost will only total $9.91 billion. However, from Diageo’s perspective, it will actually be receiving $10.5 billion as GM’s stock appreciated in value to $42.55/share for their 141 million shares. If the stock price is $38.00 or less, General Mills will only receive...