General Mills and Pillsbury

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 billion believing their own shares were undervalued and Diageo would profit from this (with their 141 million shares) once the GM stock price rises. Therefore a provision was created stating that one year after the deal Diageo will pay General Mills another $642 million if the stock price reaches $42.55. This was an attractive incentive for both sides. Diageo owned 33% of General Mill so if the stock price rose Diageo wouldn't mind paying another $642 million to GM. However, if the price is lower than $42.55 then Diageo’s payout is correspondingly less.

General Mills Profile

General Mills is a major manufacturer of consumer foods and is based in Minneapolis MN. In 2000 they were the largest producer of yogurt and second largest in ready to eat cereal. These were mature markets in the US and General Mills was looking internationally for expansion. Another possibility for growth was to acquire another major food manufacturer such as Pillsbury, at a fair price.

Diageo PLC

Diageo was predominantly a beverage supplier owning name brands such as Smirnoff, Johnnie Walker and Guinness. They also acquired the fast food chain Burger King as well as food manufacturer, Pillsbury. In their portfolio the food segment was dragging down earnings and Diageo wanted to re-focus their...