Diageo Plc

Table of Content

1. Introduction 1

2. The decisions to sell Pillsbury and list Burger King 1

2.1 Volatility of cash flows 2

2.2 Probability of financial distress 3

2.3 Increased valuation of Diageo 3

2.3.1 Comparables 3

2.3.2 Cash flow 4

2.3.3 Increased leverage 4

2.3.4 Acquisitions 4

3. Implicit assumptions of the Monte Carlo simulation 4

3.1 Capital expenditure 5

3.2 Investment in intangibles 5

3.3. Working Capital 5

3.4 Consistency between implicit and explicit assumptions 5

4. Description of the working of the simulation 6

5. The results of the simulation in comparison with Diageo's stated capital structure policy 6

5.1 Diageo's stated capital structure policy 6

5.2 The results of the Monte Carlo simulation 7

5.3 Increase in gearing for Diageo 7

6. Conclusion 8

References II

1. Introduction

When Grand Metropolitan plc and Guiness plc merged in 1997, they created Diageo plc, the seventh largest food and drink company in the world. With annual sales toping £13 billion and a market capitalization of almost £24 billion, Diageo was primed to become even more profitable, as the merger should help Diageo top the industry while also saving an estimated £290 million per year on overhead expenses and production and purchasing. Diageo was split into four business segments, the largest its Spirits and Wine business, holding the leading market share in the US and UK with revenues of £5 billion. With brand names like Smirnoff, Johnnie Walker, and Tanqueray the Spirits and Wine business had 15% operating margins and 15% growth of total operating profits. Guinness Brewing was Diageo’s second largest division, producing and selling beer around the globe. Diageo was merging Guinness Brewing with the Spirits and Wine business to save an estimated £130 million per year by integrating the distribution channels globally (Chacko and Tufano 2003, p. 1). Pillsbury, a leader in packaged foods, and Burger King, a fast-food restaurant chain, made...