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Doughboy to GenMills?
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July 13, 2000: 2:38 p.m. ET
Britain's Diageo eyes potential $11B Pillsbury pact with U.S. food company
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NEW YORK (CNNfn) - British food and beverage company Diageo PLC Thursday confirmed that it is negotiating the possible sale of its Pillsbury subsidiary to General Mills Inc., the U.S.-based maker of Cheerios cereal and Betty Crocker cake mixes, for $11 billion in stock.
"Diageo and General Mills are engaged in discussions concerning a potential business combination with Pillsbury," London-based Diageo said in a statement. "There is no certainty that these discussions will lead to a transaction. Diageo does not intend to make any additional comments unless and until an agreement has been reached."
General Mills, which also makes such familiar products as Wheaties cereals and Yoplait yogurt, confirmed midday Thursday that it is having discussions Diageo. No agreement has been reached and there can be no assurances that any transaction will result from the talks, General Mills said.
 Diageo (DEO: Research, Estimates) hopes to keep a minority stake of between 25 and 40 percent in Minneapolis-based Pillsbury, the maker of Haagen-Dazs ice cream and Green Giant frozen foods, as part of any deal with its hometown rival General Mills. It said other potential bidders, such as ketchup maker H.J. Heinz & Co. (HNZ: Research, Estimates), could also step forward as possible buyers Pillsbury, which Diageo purchased in 1989.
Diageo shares fell 1.6 percent to 601.5 pence in London Thursday morning. In New York, the company's stock slipped 13/16 to 36-1/16 in early trade.
Acquisitions and divestments
Food makers are under pressure to combine as a way of trimming costs and bolstering their market power. Profit margins have suffered as supermarket chains -- the food industry's main customers -- have grown bigger by mergers and acquisitions, gaining ever-greater power to force down their suppliers' prices for packaged foods.
 James Barrett, an analyst at Josephthal & Co., says that the difficulties in squeezing out higher profit in the competitive American food market made Pillsbury something of a disappointment for Diageo.
"First of all, predominantly all of its sales are in North America," he said on CNNfn's "In the Money." This is a very mature food market, a very competitive food market. It has had to rely on new product introductions, and that's inherently a high-risk business plan."
Anglo-Dutch food and consumer products company Unilever (ULVR) recently agreed to a $24 billion buyout of U.S.-based Bestfoods Inc. (BFO: Research, Estimates) while Philip Morris Cos. (MO: Research, Estimates) is auctioning off its Nabisco arm. 
Diageo shareholders have been calling for a move that would allow the company to focus on its better-performing drinks divisions, which include brands such as Guinness beer, Johnnie Walker whiskey, Smirnoff vodka and Gordon's gin. The unit accounts for two-thirds of the company's profit, and sales rose 9 percent in the year ended in June, while Pillsbury's sales fell slightly.
Last month, Diageo said it would offer shares in its Burger King restaurant chain in a listing on the New York Stock Exchange.
Burger King was part of the Pillsbury company taken over by British company Grand Metropolitan in 1989, and became part of Diageo when GrandMet and Guinness merged in December 1997.
"Focus has been the watchword in this industry," said Warburg Dillon Read analysts Philip Morrisey. "That's partly why [Diageo] announced the Burger King flotation." An $11 billion price tag for Pillsbury would be "consistent with previous speculation," he said.
General Mills last month reported that sales in the quarter rose 6 percent to $1.7 billion; putting it neck-and-neck with Kellogg Co. (K: Research, Estimates) as the top U.S. maker of breakfast cereal.
Shares of General Mills (GIS: Research, Estimates) rose 1/4 to 37. 
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