Memo
To:
Diageo Plc.
From:
Abenaa Ampratwum, Scott Foglietta, Yang Xin
CC:
Maurry Tamarkin
Date:
January 31, 2014
Re:
Capital Structure
Diageo was created by the merger in 1997 of Guinness plc and Grand Metropolitan plc,
two of the world’s best-known drinks companies. At the time of the merger, Grand
Metropolitan’s major brands included J&B, Smirnoff and Gilbeys, as well as Baileys
Original Irish Cream. These strong spirits brands were seen as complementing the leading
position held by Guinness in stout and beer. The company’s history of developing great
brands extends beyond these brands, however. Today Diageo produces a range of fine
beers, ales and lagers in a number of locations where there is an established brewing
tradition and where high quality raw ingredients can be locally sourced.
Diageo was trying to refocus its long term strategies by reducing subsidiaries that did not
compliment its vision. Its business was concentrated in the fast food, food packaging, and
alcoholic beverage. Its largest and fastest growing division was wine and spirits. This
segment had the most of the company’s sales and gave the largest profit margin. The next
largest division was Guinness, which Diageo intended to merge with wine and spirits to
save cost. The last divisions were Pillsbury and Burger King.
The company’s new strategy was to focus on alcoholic beverage, driving growth around
existing brands and providing an improved base for sustainable growth. This restructuring
process involved first divesting its Pillsbury business and then phasing out its Burger King
line in two years. Subsequently, Diageo would concentrate on organic growth through
acquisitions in the alcoholic beverage industry. To do this, the company was expected to
have annual cash flows between 3 and 8 million Dollars to accommodate all the capital
expenditure and to finance all the proposed acquisition projects. Although Diageo was one
1
of the largest alcoholic beverage firms, these acquisitions would position it to capture
majority market share and certain efficiencies and synergies.
