General Mills

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Contents
1.REPORT SUMMARY1
2.OVERVIEW OF GENERAL MILLS, INC.1
3.OVERVIEW OF DIAGEO PLC AND PILLSBURY COMPANY2
4.OVERVIEW OF GENERAL MILLS’ ACQUISITION OF PILLSBURY3
5.GENERAL MILLS’ STRATEGIC MOTIVES FOR ACQUIRING PILLSBURY4 6.IS THE DEAL ECONOMICALLY ATTRACTIVE?5
6.1.VALUATION OF PILLSBURY (WITHOUT SYNERGIES)5
6.2.VALUE OF SYNERGIES (COST SYNERGIES)5
6.3.VALUE OF CLAWBACK6
6.4.VALUE OF GENERAL MILLS’ STOCK PAYMENT9
6.5.VALUE OF DEBT ASSUMED9
7.RECOMMENDATION FOR GENERAL MILLS’ SHAREHOLDERS10

1.REPORT SUMMARY
On December 8, 2000, management at General Mills proposed a plan to acquire Pillsbury, a baked-goods producer. Pillsbury is currently controlled by Diageo PLC, one of the world’s leading consumer goods companies. The deal specifies that General Mills is to create and thus issue additional shares of common stock to Diageo in exchange for complete ownership of the Pillsbury subsidiary. If the deal is executed, Diageo will become General Mills’ largest shareholder. The consideration to Diageo would include 141 million shares of the company's common stock and the assumption of $5.142 billion of Pillsbury debt, making the deal worth over $10 billion. In addition, the agreement will contain a contingency payment, as up to $642 million of the total transaction value may be repaid to General Mills at the first anniversary of the closing, depending on its average stock price at that time. In this report, we will calculate and analyze various costs and benefits associated with the transaction to determine whether or not General Mills’ shareholders should vote for the proposed acquisition. If approved, General Mills will become the fifth largest food company in the world 2.OVERVIEW OF GENERAL MILLS, INC.

General Mills manufactures and markets branded consumer foods worldwide. It has a strong presence in the United States, as it is the nation’s largest producer of yogurt and the second largest producer of ready-to-eat breakfast cereals. The company owns many product segments that are marketed under high-profile brand names, such as Betty Crocker, Yoplait, Cheerios, and Big G. Each of these businesses in the United States was mature and offered relatively low organic growth. Because of this reason, the firm has pursued numerous expansion opportunities that have successfully positioned General Mills as a market leader. Its expansion efforts have proved successful, as General Mills had annual revenues of about $7.5 billion in the fiscal-year 2000. Although highly profitable, General Mills is facing increased competition in the food industry, as rivals are consolidating and becoming more difficult to compete against. Therefore, General Mills must be able to recognize and thus act on potentially high-yielding investments that will allow the company to expand despite the slow-growth food industry. Through a program of aggressive share repurchases in the 1990s, General Mills had increased its book value debt-to-equity ratio dramatically compared with its peers. Despite this fact, General Mills still maintains an investment grade bond rating from the rating agencies. 3.OVERVIEW OF DIAGEO PLC AND PILLSBURY COMPANY

Diageo is one of the world’s leading consumer goods companies formed in 1997 through the merger of GrandMet and Guinness. Its product portfolio consisted of prominent alcoholic-beverage brands such as J&B, Johnnie Walker, Smirnoff, Gordon’s, Tanqueray, and Guinness as well as the Burger King fast food chain and Pillsbury. Pillsbury is a baked goods company that operates under Diageo. Pillsbury is one of America’s best-recognized names in the food industry. Marketing its goods under the popular Dough Boy character, Pillsbury has successfully positioned its brand and has created a longstanding platform for success in the food industry. The company also controls several other high-profile brands, such as Green Giant, Old El Paso, and Progresso. Not...
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