General Mills’ Acquisition of Pillsbury from Diageo PLC

Case Solution

Robert F. Bruner
Darden School of Business ()

In December 2000, General Mills shareholders were presented with a prospectus for the merger and a power of attorney setting out the terms under which General Mills would acquire Pillsbury from Diageo plc. The payment consisted of General Mills stock, the assumption of Pillsbury’s debt, and an unusual contingent payment. The student’s job is to evaluate and rate the contingent payment to assess the attractiveness of the proposal and make a recommendation for shareholders to vote on the proposal. The conditional payment is similar to a conditional value right (CVR) that offers sellers protection against losses in the event of an acquisition. CVRs can be modeled as two options: (1) a long call option on a low share price and (2) a short call option on a higher share price. The combination of a CVR with the buyer’s underlying inventory converts the payment to the seller from a floating stock to a fixed collar. The student analysis can break down the conditional payment into its two basic options and evaluate the entire instrument. The teaching objectives of this case are: (1) to train students’ abilities to identify and evaluate options, (2) to illustrate how the use of contingent payments can bring together different points of view about the value of a target company, and ( 3) To make suggestions to play the important role of synergy expectations in evaluating payment terms.

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