Case: Diageo Ple Analysis
This is a strategic options case regarding Diageo PLC. Diageo is a conglomerate focusing on premium alcoholic beverages. Diageo is a United Kingdom based consumer product company. Diageo was formed in November 1997 from the merger of Grand Metropolitan Plc. and Guinness Plc., two of the world’s leading consumer product companies. The company began with the mission to be the strongest premium alcoholic beverage producer worldwide. Diageo Plc. is the seventh largest food and drink company in the world with a market capitalization of nearly ￡24 billion and annual sales of over ￡13 billion to more than 140 countries. Although the largest and the fastest ...view middle of the document...
This process required 400-500 millions in the next five years. Growth could also come from acquisitions, but the amount that Diageo might need was virtually impossible to estimate with much certainty. This process required 6-8 billion in the next three years. What’s more, both Guinness and Grand Metropolitan used reasonably little debt to finance themselves prior to the creation of Diageo. When the companies merged, management chose to retain the policies of the merged companies. While Diageo could have increased its debt to A, because the strong debt rating afforded considerable benefits for Diageo in the capital markets, such as raising financing rate more readily and paid lower promised yields, and was able to access short-term commercial paper borrowings at attractive rates. All about these above make Diageo rethinking its financial policies, quantify the characterization of the tradeoff between the costs and benefits of different gearing, or leverage policies to make sure the firm’s financial policies provided enough flexibility to carry out Diageo’s core strategy, meanwhile, simulating the costs of financial distress.
At the very beginning let’s focus on the volatility of the different subsidiaries of Diageo. According to the Exhibit 7A volatility of Diageo’s spirits division was 2.3%, volatility of Diageo’s beer division was 3.0%, volatility of Diageo’s food division was 3.1%, and volatility of Diageo’s fast food division was 3.6%. And the both weighted average volatility of industry ROA was 1.9%. Comparing between these 4 divisions, spirits and beer divisions were more stable and profitable. According to the case spirits business was not only the largest segment of Diageo, but also the most profitable business with highest rate of growth. Beer business was the second largest with very close profitability and rate of growth. Diageo need to overcome financial distress through maintaining EBIT/interest higher than 1. Few things could be done to support the growth of the company.
First of all Diageo could think about getting rid of two of its subsidiaries, those who are gaining less profit although having higher volatility. As per the case action of selling food and fast food divisions would help Diageo restructure its capital structure and get some cash. By selling Pillsbury & Burger King, Diageo would get a big amount of money and throw away part of its debt.
Second, find ways to lift the stock price of the company. There were a couple of ways to lift the stock price. For example, Diageo could get rid of its divisions, like Pillsbury and Burger King, which were not performing well, or repurchase its outstanding stocks of the company. General Mills already offered a certain price to acquire Pillsbury. However, Burger King’ spin-off would gain Diageo an uncertain income in two years.
Finally through “Organic Growth” and “Potential Acquisition Diageo could increase growth of the company. To implement “Organic Growth”,...