Diageo Hits The Bottle

Investors love Walsh's move to exit food and embrace drink

Investors at British food and alcohol giant Diageo PLC finally have reason to raise a glass. After three years of sluggish sales and a sinking share price, the conglomerate, which owns Burger King Corp., Pillsbury Co., and many leading liquor labels, is getting a makeover. And it's CEO-elect Paul Walsh whom investors will be toasting. Although Walsh doesn't formally take control until January, he is already making his mark. On July 17, he announced the $10.5 billion merger of Pillsbury and General Mills Inc. That gives Diageo shareholders 33% of the enlarged business while enabling Diageo to off-load more than $5 billion in Pillsbury-related debt.

Bye-bye baked goods and burgers--and back to booze. That, in a shot glass, is Walsh's strategy. As the former chief exec at Pillsbury, he watched Diageo's stock price drift to an all-time low of $6 by last March, chiefly because of increased competition in the food business. Diageo's alcohol division, which boasts such brands as Guinness stout and Gordon's gin, already accounts for 65% of group sales; long term, Walsh wants to exit the food business completely to expand the more lucrative spirits, beer, and wine businesses. Pretax profits for the group last year were $2.7 billion, on sales of $18 billion.

Walsh has to move quickly. He hopes to save $155 million by 2003 by combining the wine and spirits division, United Distillers & Vintners, with the brewing business. The market likes Walsh's thinking. Diageo stock has risen some 30%, to $9, on the London exchange since he started restructuring.

Walsh's latest moves come just weeks after the company decided to float 20% of Burger King in New York early next year. That is expected to raise as much as $3.8 billion, giving Diageo a sizable cash stash. First on his list are likely to be Seagram's brands--Captain Morgan rum, Martell cognac--up for sale since the merger with France's Vivendi. He also wants to expand his wine business.

GREEN GIANT. Refocusing on drinks reverses the strategy of retiring CEO John McGrath, who was pivotal in the merger of foods company Grand Metropolitan PLC and Guinness, from which Diageo was born in 1997. The market never understood the logic of lumping together the Pillsbury doughboy and the Jolly Green Giant with Johnnie Walker and Jose Cuervo. Despite its recent runup, Diageo has lagged behind the London stock index by 20% since 1997.

Some observers think Walsh, who has risen steadily at Diageo since the mid-1980s, hasn't gone far enough. "People are disappointed that they didn't get out of food altogether," says Morgan Stanley Dean Witter beverage analyst Alexandra Oldroyd. Walsh deflects such criticism as naive. Exiting foods overnight is not possible, he asserts, since General Mills' cash-and-stock deal was the only prospect in sight. "Not many companies have $10.5 billion in cash," he says. Still, it's a safe bet he's already planning how he'll spend the proceeds when he does sell out.

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