General Mills Inc., the maker of Cheerios cereal, agreed to buy Diageo Plc’s Pillsbury unit for $10.5 billion in stock and assumed debt to create the third- largest U.S. food company.
General Mills will pay 141 million shares, valued at about $5.4 billion, and take on about $5.1 billion of Pillsbury debt. Diageo will have a 33 percent stake in the combined General Mills- Pillsbury and two seats on the its board.
“By combining those assets with General Mills we will create a new force in the food industry,” Diageo Chief Operating Officer Paul Walsh said. “The synergies are substantial, but so too are the opportunities to accelerate top line growth.”
General Mills wants more clout with grocers as sales of breakfast foods, which generate about 60 percent of profit, fall and lower costs as it competes with acquisitive rivals such as Unilever. Diageo is abandoning food in favour of faster-growing liquor brands including Johnnie Walker whisky and Smirnoff vodka.
Shares in Diageo rose as much as 13 pence, or 2.2 percent, to 610p. General Mills, the Minneapolis-based maker of Cheerios cereal, fell 11/16, or 1.9 percent, to 36 5/16 on Friday.
Rose said Diageo may use the cash freed up by the Pillsbury sale to make acquisitions. The company is also considering returning funds to shareholders. The sale will enhance earnings per share by as much as six percent before goodwill and exceptional items during fiscal 2001, he said.
Diageo also said it would combine its liquor and Guinness beer businesses, generating annual cost savings of 130 million pounds ($194.5 million).
Pillsbury, also based in Minneapolis, generated 3.7 billion pounds in revenue in fiscal 1999, or 32 percent of Diageo’s total, and 478 million pounds of operating profit.
If Pillsbury were a separate company, it would trade at about 19 times earnings, similar to U.S. food rivals, Donaldson Lufkin & Jenrette Securities Inc. analyst Ian Shackleton said.
General Mills’s operating profit reached $1.1 billion in fiscal 2000 on sales of $6.7 billion. The company has a market value of $10.7 billion, based on Friday’s closing stock price.
The takeover follows Unilever’s agreement to buy Bestfoods for $24.3 billion and Philip Morris Co.’s agreement to acquire Nabisco Holdings Corp. for $18.9 billion.
General Mills is buying North American rivals with products that strengthen existing lines or give a foothold in high-growth categories. The company acquired four food businesses last year, including Lloyd’s Barbecue Co. and Gardetto’s bakery.
Diageo plans to sell up to 20 percent of its Burger King fast – food chain and may later shed the rest of the business. Liquor generated more than half of last year’s operating profit, and sales rose 9 percent in fiscal 2000 as Pillsbury’s fell.
Selling Burger King and Pillsbury, the maker of Green Giant canned and frozen vegetables, frees up cash that Diageo can use to develop its liquor operations. Chief Executive John McGrath has said he would be interested in buying Seagram Co.’s Captain Morgan spiced rum and Crown Royal Canadian whiskey. Reuters