Diageo confirms Pillsbury sale

Cheerios is America's most popular breakfast cereal

The British drinks giant Diageo is to sell off its food division, Pillsbury to rival General Mills.

The deal will create a group worth around $10.5bn (£7bn), the fifth biggest food business in the world. Diageo will retain a 33% minority stake, and will receive $4.5bn (£3bn) in cash to develop its lucrative spirits and beer business.

Diageo also plans to merge its drinks businesses, bringing together its UDV spirits division with Guinness brewing, in order to compete more effectively in the global drinks market.

The new drinks division would have sales of £7bn and profits of £1.2bn, with 30,000 employees.

Diageo has 12 of the top 100 spirits brands, but it hopes to expand that list by bidding for some of the Seagram brands that are expected to come on the market when that company completes its merger with Vivendi.

It hopes to realise savings of £130m from the consolidation.

Recipe for a merger

The combination of the two food groups will create a company with sales of $12.8bn and more than 100,000 employees.

"The combination of Pillsbury and General Mills creates a major new force in the changing US food industry," the companies said.

Pillsbury and General Mills are both based in Minneapolis, the centre of the US grain belt, where they produce a range of cereals, baking products and ice cream that include some of America's best-known brands.

The deal would combine Pillsbury's Doughboy products, Haagen-Dazs ice cream, Green Giant vegetables and Old El Paso Mexican foods with General Mills's Cheerios breakfast cereal and Betty Crocker cake mixes.

General Mills says it will sell off Pillsbury's cake mixes to avoid any anti-trust concerns, and will dispose of the Green Giant frozen vegetables business due to low profits.

The companies say that the merger will generate cost savings of $220m in 2002 and $400m in 2003.

In recent months, a flurry of mergers has swept through the US food industry, with Unilever acquiring Bestfoods for $20bn, and Phillip Morris acquiring Nabisco for $14bn.

Pressures on profits

The pressure for a deal is being driven by stockholders who are concerned that the food businesses are a drag on earnings.

Diageo, which was created by the merger of Guinness and Grand Met, has a lucrative clutch of spirits brands including Gordon's gin, Johnny Walker Scotch, and Smirnoff vodka.

The new Diageo boss, Paul Walsh, who ran Pillsbury in the 1990s, prefers a merger to an outright sale, which would generate a huge capital gains loss.

In a trading statement, Diageo's said the spirits and wine business had performed strongly in the past year, but Pillsbury's sales in North America were down about 2%.

Rival UK spirits company Allied Domecq is also in the process of disposing of its food and restaurant assets.

And Diageo plans to sell off some of its other food businesses, including Burger King, in order to concentrate on spirits.

American history

The two food companies set to merge are part of American consumer history, and bitter rivals.

General Mills, whose founder Callender Washburn built the first flour mill west of the Mississippi in 1866, pioneered the development of instant cake mixes with its Betty Crocker brand, originally devised as a pen name for the company when writing back to consumers.

It devised the first breakfast cereal ad campaign in the 1930s with 'Wheaties .. the breakfast of champions', and was an early sponsor of radio and television programmes.

Rival Charles Pillsbury founded his flour mill in 1869, three years later, and became the largest miller in the United States. The company grew rapidly by acquisition in the 1960s and 1970s before being acquired by Grand Met in 1989 for $5.8bn.