Merger talks hint at Diageo strategy

LONDON - Diageo, the maker of Guinness and Haagen-Dazs ice-cream, has confirmed it has been discussing a merger of its Pillsbury consumer foods unit with General Mills, a US cereal company.

The move indicates the British group's return to its roots as a focused drinks business.

The announcement, which came just weeks after Diageo said it was planning a partial flotation of its Burger King subsidiary, is expected to lead to an $US11 billion ($23.8 billion) deal, which would hand the world's biggest drinks company a 30 to 40 per cent stake in the enlarged food unit as well as a one-off cash payment.

The merger would leave Diageo free to expand its UDV wines and spirits unit and Guinness beer division while allowing it to benefit from the ongoing wave of consolidation in the US food industry. It is seen as more attractive than an outright sale because it allows Diageo to avoid a capital gains tax hit.

One analyst said Diageo could use the proceeds to bid for some of the drinks brands being sold by Canada's Seagram as a result of its $US29.2 billion merger with Vivendi and Canal Plus of France. Such a move would prevent Diageo's rival, Allied Domecq, from snapping up the whole Seagram portfolio.

Diageo could also step up its presence in Asia and Africa to consolidate its position as the world No 1.

While most analysts expect the Pillsbury merger will eventually lead to Diageo's exit from the food sector, it is unlikely that this would happen soon because of the effect on share price of the combined business.

If the Pillsbury-General Mills deal goes ahead, it will be the latest in a string of tie-ups in the US food sector.

Last month, Unilever paid $US20.3 million to acquire Bestfoods and later Philip Morris bought Nabisco for $US14.9 billion.

It has long been thought that Pillsbury, which combines the famous Doughboy products with Green Giant vegetables and Old El Paso Mexican foods, is too small to prosper on its own.

General Mills has annual sales of $US6.7 billion, compared with Pillsbury's $5.72 billion turnover and $717 million operating profit.

- INDEPENDENT