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Diageo finally sells General Mills block

When Diageo offloaded its US Pillsbury food division to General Mills for stock in 2001, it did not expect still to be the biggest shareholder in General Mills three years later. But as pressure mounted to dispose of the stake, poor performance at Pillsbury, SEC investigations into General Mills and the overhang of the Diageo block held back the share price. It took an exceptionally well-structured and well-executed deal to overcome these obstacles last month.

BY MID-AFTERNOON on October 4 General Mills' stock price had started to go up. It was a heartening sign for the investment bankers at the four lead underwriters marketing a $2.3 billion concurrent convertible and General Mills common stock secondary offering. It brought a sense of justification to an execution strategy that had been three years in the planning and relief that it all seemed to be working on the day.

General Mills stock had been flat for most of the year, underperforming the food sector index. The company was under investigation by the SEC. The share price had closed down five cents the previous trading day, a Friday, and now, on the Monday, almost 8% of the company's outstanding shares were being sold in an increasingly rare type of US capital markets transaction: a marketed, rather than bought, deal.

Its success shows that, even in volatile and unpromising markets, large and complex equity offerings can still succeed. To do so, they need to be well structured, and the vendor and the company whose stock is being sold must find common ground and work together with the banks to wrest some control from buyers, not least the hedge funds.

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