MPR: Good Investment or Risky Bet?

Good Investment or Risky Bet?
By Andrew Haeg
December 8, 2000

General Mills shareholders overwhelmingly approved the company's plans to buy Pillsbury from London-based Diageo. Combining the two old-line Minneapolis firms will produce the nation's third-largest food company, with combined revenues of roughly $13 billion. While most analysts think the merger makes sense, some are still worried General Mills is making a risky bet.

GENERAL MILLS CEO Steve Sanger said the shareholders' vote to approve the $10.5 billion deal was no surprise.

"(The vote) was obviously a very strong endorsement of this combination," he said. "It just represents another step in the process of completing this transaction, which we think is going to be a great one for the company."

The company's shareholders clearly shared Sanger's optimism, but some large questions still loom over the deal. For one, General Mills will assume more than $5 billion in Pillsbury debt. The company's merger prospectus it sent out to shareholders warned the deal may limit the General Mills ability to invest in expanding the business.

Sanger disagrees, citing credit rating agencies that only slightly downgraded General Mills' debt rating after reviewing the deal.

"They recognize that we will have a very strong cash flow, which will give us the capacity to service that debt and still meet our investment needs to build the business in the future," he said.

The company hopes to use that strong financial base to expand its presence in fast-growing markets. Most prominently, taking over Pillsbury will enable General Mills to quadruple its business in the food service industry, where, increasingly, convenience is king.

"Almost all of the growth in retail food markets is in the food service side, that is in restaurants and quick service, rather than in the grocery store side of retail food," notes Jean Kinsey, director of the Retail Food Industry Center at the University of Minnesota.

Kinsey says busy Americans are preparing fewer meals, and eating less food bought from grocery stores; instead, they're eating out more, and buying more prepared meals.

Kinsey says General Mills was strong in the grocery store, with its cereals and dough products, but weak in restaurants and food service. But even those who support the deal think it's a bit of a gamble.

"Steve Sanger is clearly making a pretty big bet on his own reputation," says George Dahlman, an analyst at US Bancorp-Piper Jaffray. He likes the merger, but says it's much larger than any of General Mills' previous acquisitions, and thus a big step into unknown territory.

"Clearly this is a big bet, and I think General Mills and its management team are up to it. But it's a new way of looking at the company, and it's taken a long time for Wall Street to figure that out," says Dahlman.

Wall Street has received the deal favorably. General Mills stock has gone up some 15 percent since it announced the acquisition in July.

That rise has silenced most critics. But not Cliff Whitehill. Whitehill owns shares in General Mills, and while he's retired now, he worked at the company for 38 years, most recently as general counsel.

"A friend of mine was asking to explain this in simple terms to him. And since I'm a boater, it's like being out in the middle of a bay, and taking a 300-pound anchor and tying the rope around your wrist; it's 20-feet of rope, and you throw it overboard. Well, you hope that the bottom is going to be 15 feet, and the anchor will hit solid. Unfortunately if the water is 30-feet deep, guess what happens? You get pulled overboard," says Whitehill.

Now that shareholders have approved the deal, the final step will be approval from the Federal Trade Commission, which Sanger says should come early next year.

He says some people will lose their jobs when the merger is completed, but puts the number in the hundreds, rather than thousands, as some analysts initially predicted.

Andrew Haeg covers business for Minnesota Public Radio. Reach him via e-mail at ahaeg@mpr.org.

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