General Mills to buy Pillsbury for $ 10.5 bn

General Mills to buy Pillsbury for $ 10.5 bn
REUTERS

July 17: General Mills Inc said on Monday it reached a definitive agreement to buy the Pillsbury food business from Britain's Diageo Plc for $10.5 billion in a deal that should boost earnings and yield cost savings.

The Minneapolis-based cereal giant said the deal for Pillsbury, known for its chubby Doughboy character, should see cost savings of $25 million in fiscal 2001. General Mills expects savings of $220 million in 2002 and $400 million by 2003.

The combination should raise General Mills' sales growth rate by at least a percentage point on top of the 6 per cent average growth seen since 1995, the company said. As a result, the maker of Cheerios, Wheaties and Betty Crocker mixes boosted its earnings growth target by 1 to 2 points to a range of 11-15 per cent.

The company said the deal should boost cash earnings per share in fiscal 2002 and be neutral to reported earnings per share in fiscal 2004.

General Mills said it plans to sell Pillsbury's North American dessert mix business as well as the North American Green Giant canned vegetable business. Those divestitures should be completed by the end of fiscal 2002, the company said.

The transaction would nearly double the size of General Mills, whose brands include Cheerios cereal, Yoplait yogurt and Betty Crocker cake mixes, giving it about $13 billion in annual sales. It would become the third-largest food company in North America and the fifth-largest in the world.

The deal also would cement the long-awaited consolidation of the food industry, coming on the heels of Unilever's pending $20.3 billion acquisition of Bestfoods and Philip Morris' planned $14.9 billion acquisition of Nabisco Holdings Corp. Food companies have been grappling with weak sales, low inflation and mammoth retailers demanding discounts.

Under terms being discussed, General Mills will pay $5.4 billion in stock and $4.5 billion in cash, people familiar with the matter said. The two sides had haggled over price for some time, and the debate was settled when Diageo agreed to accept about $600 million in "contingent value rights," should General Mills stock not rise above $42 a share. The cash portion of the deal is likely to come in the form of Diageo's assigning debt to General Mills.

Diageo is expected to own about 33 per cent of the combined General Mills-Pillsbury and get two board seats. The two companies are expected to sign a standstill agreement, preventing Diageo from taking over General Mills. General Mills is expected to sell Pillsbury's Green Giant line of canned vegetables, a product that analysts say doesn't fit with the rest of General Mills' refrigerated portfolio. It also may sell Pillsbury's dessert mixes, which compete with its brands. The two companies expect annual cost savings of $400 million within a few years.

Nestle SA, the world's biggest food company, has a sizable joint venture with General Mills in the cereal business and an ice-cream venture with Pillsbury, owner of Haagen-Dazs. Analysts have long predicted an eventual takeover of General Mills by Nestle, but the Pillsbury purchase may make such a deal unattractive.