General Mills to Acquire Pillsbury for US$10.5 Billion

Today, General Mills, Inc. (NYSE: GIS) and Diageo plc (LSE: DGE; NYSE: DEO) reached THE agreement: General Mills will purchase Diageo's worldwide Pillsbury operations.

The deal is valued at US $10.5 million, comprised of $5.4 billion in stock and an additional 5.1 billion in assumed debt. General Mills will merge most of Pillsbury with its own operations, but expects to divest Pillsbury's North American dessert mix and Green Giant canned vegetable business by American dessert mix business by the end of fiscal 2002.

General Mills is spread broadly across refrigerated, frozen and dry grocery categories, which will include products such as Pillsbury's refrigerated baked goods, Yoplait yogurt, Hungry Jack frozen waffles, Totino's frozen pizza snacks, Betty Crocker and Bisquick mixes, and Big G cereals including the well-known Cheerios.

The deal "gives the Pillsbury brands the right platform from which to achieve their full potential," said Paul S. Walsh, CEO of of Diageo, which is based in London, England. Diageo is a leading international marketer of alcoholic beverages including Smirnoff, Johnnie Walker, Guinness, J&B, Gordon's, Tanqueray, Pillsbury …plus the Burger King fast-food chain.

Pillsbury appears to be more at home in General Mills' $7.5-billion (fiscal 2000) brand portfolio, which is decidedly more conducive to marketing grain-and-bakery-oriented products—including Big G ready-to-eat cereals, Betty Crocker dessert, baking and dinner mix products and snack products.

General Mills expects Pillsbury to generate top-line revenues in "growing market categories, several of which represent dynamic new growth platforms for General Mills," according to Steve Sanger, chairman and CEO, who also said there were many complementary "manufacturing, distribution and sales synergies."

Of course, "synergy" is a trigger for consolidation--General Mills is planning to cut $25 million in fiscal 2001 costs and approximately $220 million in fiscal 2002, increasing to approximately $400 million annually by 2003. The streamlining will reportedly come from "general and administrative functions, greater supply chain efficiencies, synergies in selling and marketing activities, and increased economies of scale," the company said today.

On the corporate culture of melding, Sanger added that General Mills and Pillsbury—both based in Minneapolis, MN, USA, Sanger added, "Our two companies have similar cultures, due in part to a shared Minnesota heritage that traces back more than a century. We know the experiences and insights of Pillsbury people will be key drivers of our future success."

What Does Pillsbury Bring to the Party?

• Refrigerated dough, which General says will make it the leader in the refrigerated grocery business, where it already owns Yoplait and Columbo yogurts as well as various refrigerated entrées.
  
• Hungry Jack frozen waffles and frozen pastries to the Big G ready-to-eat cereal line.
  
• Totino's frozen pizza and snacks, Green Giant frozen vegetables and meal starters, Progresso soups, and Old El Paso Mexican foods joining the Betty Crocker dinner and side dish mix businesses.

In business terms, General Mills expects to see its sales nearly double and approach the $13-billion mark, especially since "Pillsbury's major retail categories have been growing at a significantly faster rate than General Mills' categories." The company added that its evolving product mix will be better geared to convenience foods, with nearly 80 percent of retail sales generated by ready-to-eat or quick-to-prepare foods.

The addition of Pillsbury will also strengthen the General's foodservice channel, to exceed $1.7 billion in sales when combined with sales from "Big G" breakfast cereals and other products.

International revenues will double to $2.3 million, the company believes, due to a better-established manufacturing, distribution and sales infrastructure in the U.K., Western Europe, Latin America and Australia.

There are some contingency plans involving stock, intended to protect Diageo's acceptance of General Mills' stock. The agreement also includes a standstill provision that limits Diageo's ability to purchase stock.

The deal is expected to close late this calendar year following regulatory review and approval by the companies' shareholders. General Mills will also assume $5.1 billion in debt as part of the deal. Overall, though, General Mills expects to become the world's fifth-largest food company with expected annual revenues of $13 billion.

Several other deals have been announced already this year, including Philip Morris Cos.' purchase of Nabisco Holdings Corp. and Unilever's acquisition of Bestfoods. For a list of articles referencing these deals and these companies: Click here.

Edited by Bob Sperber