Diageo plc: Case study questions
Ian Cray, Diageo plc’s Treasurer, looked out of his office window onto the busy streets of London in October 2000. The London-based consumer goods company Diageo had recently announced its intention to sell its packaged food subsidiary, Pillsbury, to General Mills. Earlier in the year, Diageo also announced its intent to sell 20% of its Burger King subsidiary through and initial public offering during 2001, to be followed by a spin-off of the remainder of Burger King after December 2002. If these transactions took place, the firm would be focused exclusively on the beverage alcohol industry. As Diageo’s business was restructured, it was an opportune time to rethink its financing mix.
1.How has Diageo historically managed its capital structure?
2.How does the static tradeoff theory of capital structure apply to Diageo’s business prior to the sale of Pillsbury and spinoff of Burger King?
3.Why is Diageo selling Pillsbury and spinning off Burger King? How might value be created through these transactions?
4.Based on the results of the model, what recommendation would you make for Diageo’s future capital structure?
5.Critique the capital structure model used by Diageo. Does the model capture the important risk factors faced by Diageo? How might you adjust the model?