
Diageo buys put to hedge General Mills stake sale
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.
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