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Gen Mills to buy Doughboy
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July 17, 2000: 9:07 a.m. ET
Diageo to sell Pillsbury unit for $10.5B in stock and assumed debt
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LONDON (CNNfn) - General Mills Inc. agreed to buy Diageo PLC's Pillsbury unit Monday for $10.5 billion in stock and assumed debt, turning the U.S. company into the world's fifth-largest food maker.
The deal will give Diageo a 33 percent stake in the enlarged General Mills (GIS: Research, Estimates), worth $5.4 billion. General Mills will also assume $5.1 billion of Pillsbury debt.
The deal would virtually double General Mills' annual revenue to around  $13 billion, the company said, predicting its operating profit would climb to $1.9 billion, from $1.1 billion in the year ended May 31, 2000. Annual cost savings should amount to $400 million by 2004.
The deal with Diageo values Minneapolis, Minn.-based General Mills at $16.2 billion. It will sell two Pillsbury businesses, including Green Giant, the North American canned vegetables unit.
The purchase brings Pillsbury's Doughboy refrigerated products, Haagen-Dazs ice cream and Old El Paso Mexican food together with General Mills' Cheerios, Wheaties and other breakfast cereals, Yoplait and Colombo yogurts and Betty Crocker cake mixes.
Diageo said it did not regard the General Mills holding as strategic and has pledged to sell 75 percent of its stake within ten years. It agreed to hand back around $640 million to General Mills if the U.S. company's stock price rises to at least $42.55 in the coming year, enhancing the value of the shares Diageo holds.
The companies based the purchase on a price of $38 per General Mills share, while the company's stock actually closed on Friday at 36-5/16, down 11/16. Shareholders from both companies have yet to vote on the deal.
Diageo to make acquisitions?
The London-based firm said the deal would give it additional financial firepower that it might use to make acquisitions or hand money back to shareholders. The pending merger of Seagram Co. and Vivendi SA of France will trigger Seagram's divestment of its spirits division, although analysts said Diageo might encounter objections from antitrust regulators if it tried to buy the whole of the unit.
"They're looking very closely at Seagram, they'd like to cherry-pick a couple of brands, but then so would everyone else," commented a London-based analyst, who spoke on condition of anonymity. He forecast Diageo would eventually return the bulk of the money generated by the sale to its shareholders, either as special dividends or by buying back shares.
Diageo also unveiled a restructuring of its alcoholic beverages activities on Monday, saying it would integrate its spirits unit UDV with its wine and beer divisions to form a company with annual revenue of £7.2 billion ($11 billion) and operating profit of £1.2 billion in 1999. The firm indicated the change could save some £130 million a year. The company's spirits brands include Johnnie Walker whisky, Smirnoff vodka, Cuervo tequila and Malibu.
Diageo (DGE) shares rose 3 percent to 614.5 pence in London Monday.
M & A frenzy
The deal comes amid a welter of mergers and takeovers among U.S. food companies. Unilever PLC (ULVR) recently bought Bestfoods for more than $20 billion, while Philip Morris Cos. (MO: Research, Estimates). has acquired Nabisco Holdings.
Pillsbury was part of Grand Metropolitan when it merged with Guinness to form Diageo in 1997. The other food-related arm of Grand Metropolitan is fast-food chain Burger King, and Diageo recently scheduled that business for an initial public offering.
Previously, Diageo had indicated it wanted to retain full control over the food-related businesses. The company underwent a change in leadership prior to this apparent change of tack, with Paul Walsh installed as chief executive designate, and due to take the top job in December when incumbent John McGrath retires. Walsh, formerly CEO of Pillsbury, has taken the interim position of chief operating officer. 
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Diageo
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