Diageo buys put to hedge General Mills stake sale

Diageo, the UK-based drinks company that makes Guinness and Smirnoff vodka, has bought a put option from Lehman Brothers that covers its entire remaining stake in US food company General Mills, owner of Cheerios, Green Giant and Häagen-Dazs ice cream.

The purchase makes a sale of Diageo’s remaining 25 million shares in General Mills a certainty after it sold a call on the same shares to General Mills in October of last year, finally completing its strategic exit from the food business.

This latest deal sees the drinks company pay Lehman a $5.56 premium per share for the put, which has an exercise price of $51.56. If exercised, Lehman will buy the shares between November 4 and 10 this year.

In October 2002, Diageo sold General Mills a call, also with an exercise price of $51.56, covering 26,183,088 shares and paid a premium of $3.07. General Mills has from September 28 to October 29 to exercise its call.

Diageo’s stake in General Mills stems from November 2001, when it completed the sale of Pillsbury, a baked goods company, to the food company for $10.4 billion. This comprised 134 million shares worth $5.9 billion (approximately 31% of the new entity), $3.83 million of cash and assumed debt and contingent value rights (CVRs) worth $670 million.

The payment of the CVRs depended on General Mills’ average share price being lower than $49 over the 20 days leading up to the 18-month anniversary of the deal. Payment of the full $670 million occurred if the average price was at or below $44. The CVRs were settled in April 2003 for $273 million.

Since the merger, Diageo has slowly been reducing its stake in General Mills, immediately exercising a put on 55 million shares that was part of the negotiations, leaving it with 79 million. In October 2004, it sold a further 50 million shares into the market at $45.20 a share – 33.3 million in an underwritten secondary offering with General Mills purchasing the balance – and placed 4 million shares into its employee pension plan.

The eventual sale of its remaining stake in General Mills will leave Diageo with just under $1.3 billion in cash. However, it declined to comment on what it intends to do with the money.