Diageo

Diageo'plc!

'

!

!

!

Ian!Cray,!Diageo!plc’s!Treasurer,!looked!out!of!his!office!window!onto!the!busy!streets!of!London!in!

October!2000.!The!LondonAbased!consumer!goods!company!Diageo!had!recently!announced!its!intention!

to! sell! its! packaged! food! subsidiary,! Pillsbury,! to! General! Mills.! Earlier! in! the! year,! Diageo! also!

announced! its! intent! to! sell! 20%! of! its! Burger! King! subsidiary! through! an! initial! public! offering! during!

2001,! to! be! followed! by! a! spinAoff! of! the! remainder! of! Burger! King! after! December! 2002.! If! these!

transactions! took! place,! the! firm! would! be! focused! exclusively! on! the! beverage! alcohol! industry.! As!

Diageo’s!business!was!restructured,!it!was!an!opportune!time!to!rethink!its!financing!mix.!

On!Cray’s!desk!lay!a!novel!report!by!Ian!Simpson,!Diageo’s!Director!of!Corporate!Finance!and!Capital!

Markets,! and! Adrian! Williams,! the! firm’s! Treasury! Research! Manager.! Their! analysis! sought! to! quantify)

the! textbook! characterization! of! the! tradeoff! between! the! costs! and! benefits! of! different! gearing,! or!

leverage,!policies.!Built!around!a!simulation!model!of!the!future!cash!flows!of!the!company,!their!analysis!

attempted! to! understand! the! tax! benefits! of! higher! gearing! versus! the! likelihood! and! severity! of! costly!

financial! distress.! While! the! analysis! was! still! rough! at! points,! the! concepts! and! implementation! were!

intriguing.!Now!that!Diageo!was!rethinking!its!financial!policies,!the!model!could!prove!useful.!Simpson,!

Williams!and!Cray!would!soon!meet!to!discuss!its!implications.!

Diageo’s' Business!

Diageo!was!formed!in!November!1997!from!the!merger!of!Grand!Metropolitan!plc!and!Guinness!plc,!

two! of! the! world’s! leading! consumer! product! companies.! The! newlyAmerged! firm! ! was! the! seventh!

largest! food! and! drink! company! in! the! world! with! a! market! capitalization! of! nearly! £24!...