DIAGEO PLC. Harvard Case Solution & Analysis

INTRODUCTION:

The world’s seventh largest consumer food product company Diageo PLC, is the result of merger of Grand Metropolitan and Guinness PLC. Diageo is dealing indifferent food and drink products. Diageo made the merger to become the market leader through its cost efficient marketing strategies. Due to such efforts in the market place, Diageo has been known in the market with a brand equity and that is one of the most famous brand in the world.Diageo is basically dealing in four different operations thatare Spirits & Wine Business, Guinness Brewing, Pillsbury and Burger King.

Spirits & Wine Business produces and sales beverages alcohol. Diageo beverages includes scotch, vodka, gin and tequila. Spirits & Wine business does notsale their product with their own name but with various brand names. Spirits & Wine being the largest division of the Diageo PLC in United States and United Kingdom enjoys rapid growth in sales revenue and market share. The growth is due to the effective pricing and business development strategies.

Guinness Brewing is the second division of Diageo PLC which deals in distribution of bear across the world.Not only has this, but it also sells its products with different brand names. The overall growth in sales and market share is almost moving with the similar trend as the other divisions of Spirits and Wine Business moves. Furthermore, Diageo is looking forward for a merger of both of its divisions because both have almost a similar nature and kind of behavior with respect to the particular market, provided that the growth and other market participants constant.

Pillsbury, a leading fast food products producer and packaging, is the subsidiary of Diageo plc. Burger king is another subsidiary, operates globally with a huge chain of fast food restaurants.

Paul Walsh, the group chief executive of Diageo PLC, emphasizes on the beverage alcoholto get the pace of rapidly growing alcohol market.He contempt’s that there are two different strategies that can help in enhancing market share capitalization and ensuring industry growth. Firstly,it is to sell its Pillsbury division to General Mill against shares or cash consideration. The second strategy is to sell its fast food chain to the general public through an initial public offering in different steps. The decision of the initial offering in different steps is to save tax as after 2002 there will be no tax on the floatation of shares.

The Diageo Public Limited Company is also looking forward to introduce new products in its product line and the new designs of their products to attract the consumers and to increase the market share of the company amongst the industry rivals/competitors.The Diageo Public Limited Company decides to sale more their existing products to hit a remarkable market norm and it also acquires new business to make sure that the market growth is inevitably reached.

PROBLEM STATEMENT:

The Diageo Public Limited Corporation is facing some problems in decision making that whether to expand its business divisions or product line through acquisition or merger either solely or through joint investment with any of the bidding organization. The Diageo Public Limited Corporation may narrow down its existing business division or product line by selling some part or whole of the businessdivision may reduce its product line, which is not performing up to the standard growth rate of the company. The key competitors of the company are not in good financial position to offer competing bids as compared to the Diageo Public Limited.

ANALYSIS:

Capital Structure Decision:

The Diageo public limited Corporation capital structure shows that major portion of its structure is comprised of debts. The Diageo Public Limited Corporation has to maintain an interest coverage ratio of 5 to 8 times in all time after to merger of Grand Metropolitan Public Limited Corporation and Guinness Public Limited Corporation, the company maintains the interest coverage ratio after the merger but it decreases below the benchmark of 5 times coverage ratio to 4.79 times. This fall in interest coverage may impact on the credit rating of the company. As shown in Exhibit 3. The company should look for the investment in debt instruments of a low coupon interest ratesthan the benchmark rate to maintain the interest coverage ratio between the range of 5 times to 8 times.

The other factor to maintain by the Diageo Public limited corporation while making any investment is the EBITDA (earnings before interest, taxes, depreciation and amortization) to total debt ratio of 30% to 35%. Diageo PublicLimited Corporation EBITDA/total debt is good enough to the standard set, after the formation of Diageothat is 34%.The company should find debt investments as its EBITDA/total debt is up to standard, even if there is an increase in total debts its EBITDA/Total debt would not fall below the minimum benchmark of 30% as it has enough margin ................

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