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Diageo may cook up a merger between Pillsbury, General Mills

SHARE Diageo may cook up a merger between Pillsbury, General Mills

LONDON (Bloomberg) — Diageo Plc said it's in discussions to combine its Pillsbury food business with General Mills Inc., the No. 2 U.S. cereals maker, as the world's largest liquor company focuses on more-profitable drinks operations.

The U.K. company, whose brands range from Johnnie Walker whisky to Pillsbury's Green Giant frozen food, is considering an $11 billion stock swap with the Minneapolis-based maker of Cheerios cereal, the Wall Street Journal said, citing people familiar with the talks. Diageo wouldn't provide details.

"For quite a few weeks, Diageo has been reviewing its options for Pillsbury," said Ian Shackleton, an analyst at Donaldson Lufkin & Jenrette Securities Inc. "This may not be the ultimate deal, but clearly there is a deal."

Diageo already plans to sell as much as 20 percent of Burger King and may exit food to expand the liquor business, where sales rose percent in fiscal 2000, compared to falling revenue at Pillsbury. General Mills is seeking to grow after Unilever agreed last month to buy Bestfoods for $24.3 billion.

Shares in Diageo fell as much as 14.5 pence, or 2.4 percent, to 597p. General Mills fell 1/16 to 36 3/4 yesterday.

A pact with General Mills would leave Diageo with a minority stake of more than 25 percent in the merged company, the Journal said. General Mills declined to comment.

The talks could still fall apart, and H.J. Heinz & Co., the largest ketchup-maker, may enter the bidding, the paper reported. Heinz couldn't be reached for comment. Campbell Soup Co. would also be interested in Pillsbury, analysts said.

"The greatest product overlaps between General Mills and Pillsbury are in the breakfast products, desserts and baking mixes areas," Jaine Mehring and Jennifer Hills, analysts at Citigroup Inc.'s Salomon Smith Barney, said in a note to clients.

Combining the two headquarters, which are "across the street from each other" in Minneapolis, would also trim costs, Mehring and Hills added.

General Mills is seeking to expand its North American food business. Chief Executive Steve Sanger said earlier this year he plans to continue buying companies with products that strengthen existing lines or give a foothold in high-growth categories. General Mills acquired four food businesses last year, including Lloyd's Barbecue Co. and Gardetto's bakery.

Diageo Chief Executive John McGrath told Bloomberg in June he was considering options for Pillsbury, which also makes Haagen-Dazs ice cream and Old El Paso Mexican foods

Selling Burger King and Pillsbury would free up cash that Diageo could be used to develop the liquor business. McGrath has said he would be interested in buying Seagram Co.'s Captain Morgan spiced rum and Crown Royal Canadian whiskey.

Vivendi SA plans to sell the liquor business after completing its $46 billion takeover of Seagram.