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REV. AUGUST 6, 2003


Diageo plc
Ian Cray, Diageo plc’s Treasurer, looked out of his office window onto the busy streets of London in
October 2000. The London-based consumer goods company Diageo had recently announced its intention to sell its packaged food subsidiary, Pillsbury, to General Mills. Earlier in the year, Diageo also announced its intent to sell 20% of its Burger King subsidiary through an initial public offering during
2001, to be followed by a spin-off of the remainder of Burger King after December 2002. If these transactions took place, the firm would be focused exclusively on the beverage alcohol industry. As
Diageo’s business was restructured, it was an opportune
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The firm was organized along four business segments. The largest was the Spirits and Wine business, which produced and marketed a portfolio of beverage alcohol such as scotch, vodka, gin, and tequila. Diageo’s brands included Johnnie Walker, Smirnoff, J&B, Bailey’s, Gordon’s, Tanqueray,
Cuervo, and Malibu. This division was not only the biggest (with revenues of £5 billion and the leading market share in the U.S. and U.K. markets) but also the fastest growing of Diageo’s businesses, with sales growth of 8% for the year. More than 70% of sales and sales growth came from the Europe and North
America markets. This segment enjoyed the largest profit margins of all of the segments, with 15% operating margins and growth in total operating profits of 15%. The high levels of operating profits reflected Diageo’s strategy of concentrating on premium brands and pricing. (Exhibits 1 and 2 contain historical financial information for Diageo and its business segments.)
Diageo’s second largest division was Guinness Brewing, which produced and sold beer to markets around the world. This segment, while substantially smaller in sales than the Spirits and Wine Division, was a close second to it in terms of operating profit growth rate. Due to the similarity in the products and distribution channels for these two businesses, Diageo was
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