# General Mills’ Acquisition of Pillsbury from Diageo Plc

Topics: Stock market, Stock, Pillsbury Company Pages: 5 (1919 words) Published: November 11, 2012
Case 1
General Mills’ Acquisition of Pillsbury from Diageo PLC

Estimate of Cost Savings (See Appendix)
In estimating the present value, we began by estimating the market return by using the 2-year annualized return of the S&P 500. We used the 2-year rate yield because the 1-year yield for the S&P was negative and the 5 and 10-year rate yields were exaggerated by the tech boom. We used a 10-year treasury yield for the risk free rate. For the cost of debt we used the prime rate of lending, the interest rate that banks would charge the most creditworthy, which was 9.50 percent on December 8, 2000 because General Mills had an investment grade credit rating. Next, we calculated the weight of debt and equity. Because we know that after the acquisition Diageo will own ⅓ of the General Mills we can multiply that by 3 to determine the total shares outstanding after the merger, which is 423 million shares. To find the market capitalization before the acquisition we subtract 141 million from 423 million and multiply by the stock value. We determined the stock value by using the 20-day average of GIS from November 10 to December 8, 2000, which was \$40.296 per share.

We used General Mills’ market cap and long-term Debt-to-Equity ratio, which is 6.719 percent to calculate General Mills’ long-term debt. The weight of debt is, then,
Therefore, the weight of equity is
After the acquisition, General Mills will assume \$5.142 billion in debt, which changes the weight of debt to 33.67 percent and weight of equity to 66.33 percent. Now that we have our discount rate of 8.27326% we can use excel to NPV the expected saving which are \$25 million in 2001, \$220 million in 2002, and \$400 million in 2003 pretax. The after tax saving is \$16.25 million, \$143 million, and \$260 million respectively. The pretax NPV of synergies is \$525.89 million and after tax NPV of synergies is \$341.83 million.

2. Why was the contingent value right (CVR) included...