Topics that are covered to solve this case * Benefit of the acquisition * Present value of cost savings * Deal structure * Contingent payment analysis * Acquisition cost * Recommendation
Benefits of the Acquisition * Accelerate sales and earnings growth by acquiring
Pillsbury
> Product Innovation > International Expansion > Channel Expansion > Productivity Gains * Combined product portfolio would be more balanced * Combined firm would rank 5th in size among competitors based on food sales * Cost savings
Present Value of Cost Savings * Weighted Average Cost of Capital (WACC) for General Mills > Cost of Equity = 9.6% > Cost of Debt = 9.5% > Tax Rate = 40% > After Tax Cost of Debt = 5.7% > Weight of Debt (D/V) = 10.8% > Weight of Equity (E/V) = 89.2% > WACC = 9.2% * Expected Cost Savings > 2001 = $25m, PV = $23m > 2002 = $220m, PV = $185m >2003 = $400m, PV = $307m >Total PV = $515
Deal Structure * Payment shares * Assumption of Pillsbury's debt > Existing debt = $142m > New borrowing = $5billion * Contingent payment by Diageo to General Mills
Contingent Payment Analysis * What is it? > "Claw-back" or "Contingent Value Right" >>Claw-back is previously given monies or benefits that are taken back due to specially arising circumstances. A retraction of stock prices or of the market in general. Purchasing certain investments provides taxable benefits contingent upon holding periods. When you sell these investments before they have maturity, the benefits must be returned. In Layman's terms, a fall in a stock price