Read the Harvard Business Review case study, "The Auction for Burger King," and then analyze the study by answering the following questions: What were some of the key structural issues associated with Burger King that might have led to its historical underperformance with respect to peers like McDonald's?
- What reasons might Diageo have for not allowing its franchisees to take part in the Burger King purchase process?
- Why were weekly same-store sales results so crucial to Greenhills sales process?
- What were some of the steps individual bidders took to improve their position in the auction process?
- Which bid would you consider most attractive, and why?
- Which bid would you consider least attractive, and why?
The Auction for Burger King (A) 906-012 Exhibit 10 Explanation of the Warrants Offered by Firm X A warrant gives its owner "the right but not the obligation" to purchase a certain amount of stock at a given price on or before a given date in the future. The key variables are thus the amount to be purchased, the "exercise price," and the warrant's expiration date. Terms In addition to cash consideration, Firm X offered Diageo warrants to purchase up to 8% of Burger King at an exercise price of 2 times Firm X's cost basis. The expiration date of the warrants was not noted, and possibly could be negotiated. Typical warrant expiration dates are five to ten years Call this number T. Cost Basis and Exercise Price If Firm X put in $750 million of equity, its cost basis would be $750 million. 8% of $750 million = $60 million. Exercise price for the warrants - 2 x $60 million = $ 120 million Amount to be purchased The value of Burger King equity at the end of T years is unknown. Call this number V. The warrant confers the right (but not the obligation) to purchase 8% of V. Decision to Exercise ("Right but not the Obligation") If 8% of V is greater than $120 million, the warrants will be "in the money." Diageo would then exercise its right to purchase 8% of the equity of Burger King The breakeven value of V is $120 million/.08 = $1,500 million. At the end of T years, if V $1,500, the value of the warrants would be OSV - $120 million This payoff in the future must be discounted to the present at an appropriate discount rate. 19 This document is authorized for use only by Saqb Butt (sag 210201@hotmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 906-012 The Auction for Burger King (A) Burger King subsidiary. (Five years earlier Grand Metropolitan had acquired Pillsbury Corporation in a hostile takeover. Burger King a subsidiary of Pillsbury,came as part of the package.) During the first year of operation, Diageo's financial results were mixed. While post- merger integration of global wine and spirit operations went smoothly, and cost savings in the first year were nearly 50% higher than anticipated, overall growth and profitability lagged In fiscal 1998, which reflected six months of combined operations, sales fell 7% to 12 billion and net profits fell 4% to 13 billion (See Exhibit 1 for Diageo's financial data.) Sales remained sluggish through the next fiscal year ending June 1999. As questions about Diageo's strategic focus persisted, the company's stock price began a steady decline (See Exhibit 2 for Diageo's stock price history.) In response, Diageo revamped its internal structure, merging the two core business units, UDV and Guinness. During this transitional period, the company also sold Pillsbury to General Mills In July 2000, CEO John McGrath handed over the reins to Paul Walsh. Walsh had served as treasurer of Grand Metropolitan in the late 1980s, and CEO of the Pillsbury Company from 1992 2000. Talking with the press and analysts about his new position, Walsh described his objectives "John McGrath did a fantastic job in creating Diageo. My job is to deliver topline growth in every one of its businesses."2 The sale of Pillsbury, Walsh's last act before becoming CEO, was not easy. The deal was to be a cash-and-stock transaction in which roughly one-third of General Mills' stock would be transferred to Diageo shareholders. However, the two parties could not agree on the value of General Mills' shares. General Mills believed that, at $38 per share its stock was undervalued, while Diageo believed the stock was fairly valued. To overcome this difference, the two parties designed a contingent agreement General Mills agreed to pay $10.5 billion for Pillsbury in cash and stock valued at $38 per share. Diageo agreed to establish a 5642 million escrow fund at the close of the deal. At the one-year anniversary of the close, Diageo would use this fund to pay. 1) 80, if the average daily share price of General Mills was $38.00 or less; 2) $642 million, if the average daily price was $42.55 or more; 3) a variable amount, if the daily price fell between $38.00 and $12.55.3 Walsh assumed the post of CEO with the avowed strategy of focusing Diageo on its drinks business and simplifying its lineup of business units. The sale of Pillsbury was consistent with Walsh's belief in portfolio simplification-focusing on core brands within the same business. After Pillsbury's sale, Burger King remained the only non-core business in Diageo's portfolio. (See Exhibit 3 for Diageo's segment data.) Burger King The U.S. restaurant industry was a $307 billion market in 2001, divided into four main segments: 1) quick service restaurants (QSR), 2) midscale, 3) casual dining and 4) fine dining. The QSR segment, of which Burger King was a part offered value-priced fast-food items such as hamburgers and french fries, chicken sandwiches, pizza, and Mexican food Unlike the highly fragmented full-service 2 John Willman, "Walsh Welcomed as New Chief of Diageo." Tire Firencial Times, October 8, 1999. Available from ProQuest ABI/Infom, http://proquest.com, acce 130, 2001 The regulatory process surrounding the sale of Pillsbury dragged on for many months, and the deal did not close until October 2001. By that time, the terms of the deal had changed again, although the total transaction value remained about 510.5 billion 2 This document is authorized for use only by Saqb Butt (sag 210201@hotmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. The Auction for Burger King (A) 906-012 Exhibit 10 Explanation of the Warrants Offered by Firm X A warrant gives its owner "the right but not the obligation" to purchase a certain amount of stock at a given price on or before a given date in the future. The key variables are thus the amount to be purchased, the "exercise price," and the warrant's expiration date. Terms In addition to cash consideration, Firm X offered Diageo warrants to purchase up to 8% of Burger King at an exercise price of 2 times Firm X's cost basis. The expiration date of the warrants was not noted, and possibly could be negotiated. Typical warrant expiration dates are five to ten years Call this number T. Cost Basis and Exercise Price If Firm X put in $750 million of equity, its cost basis would be $750 million. 8% of $750 million = $60 million. Exercise price for the warrants - 2 x $60 million = $ 120 million Amount to be purchased The value of Burger King equity at the end of T years is unknown. Call this number V. The warrant confers the right (but not the obligation) to purchase 8% of V. Decision to Exercise ("Right but not the Obligation") If 8% of V is greater than $120 million, the warrants will be "in the money." Diageo would then exercise its right to purchase 8% of the equity of Burger King The breakeven value of V is $120 million/.08 = $1,500 million. At the end of T years, if V $1,500, the value of the warrants would be OSV - $120 million This payoff in the future must be discounted to the present at an appropriate discount rate. 19 This document is authorized for use only by Saqb Butt (sag 210201@hotmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 906-012 The Auction for Burger King (A) Burger King subsidiary. (Five years earlier Grand Metropolitan had acquired Pillsbury Corporation in a hostile takeover. Burger King a subsidiary of Pillsbury,came as part of the package.) During the first year of operation, Diageo's financial results were mixed. While post- merger integration of global wine and spirit operations went smoothly, and cost savings in the first year were nearly 50% higher than anticipated, overall growth and profitability lagged In fiscal 1998, which reflected six months of combined operations, sales fell 7% to 12 billion and net profits fell 4% to 13 billion (See Exhibit 1 for Diageo's financial data.) Sales remained sluggish through the next fiscal year ending June 1999. As questions about Diageo's strategic focus persisted, the company's stock price began a steady decline (See Exhibit 2 for Diageo's stock price history.) In response, Diageo revamped its internal structure, merging the two core business units, UDV and Guinness. During this transitional period, the company also sold Pillsbury to General Mills In July 2000, CEO John McGrath handed over the reins to Paul Walsh. Walsh had served as treasurer of Grand Metropolitan in the late 1980s, and CEO of the Pillsbury Company from 1992 2000. Talking with the press and analysts about his new position, Walsh described his objectives "John McGrath did a fantastic job in creating Diageo. My job is to deliver topline growth in every one of its businesses."2 The sale of Pillsbury, Walsh's last act before becoming CEO, was not easy. The deal was to be a cash-and-stock transaction in which roughly one-third of General Mills' stock would be transferred to Diageo shareholders. However, the two parties could not agree on the value of General Mills' shares. General Mills believed that, at $38 per share its stock was undervalued, while Diageo believed the stock was fairly valued. To overcome this difference, the two parties designed a contingent agreement General Mills agreed to pay $10.5 billion for Pillsbury in cash and stock valued at $38 per share. Diageo agreed to establish a 5642 million escrow fund at the close of the deal. At the one-year anniversary of the close, Diageo would use this fund to pay. 1) 80, if the average daily share price of General Mills was $38.00 or less; 2) $642 million, if the average daily price was $42.55 or more; 3) a variable amount, if the daily price fell between $38.00 and $12.55.3 Walsh assumed the post of CEO with the avowed strategy of focusing Diageo on its drinks business and simplifying its lineup of business units. The sale of Pillsbury was consistent with Walsh's belief in portfolio simplification-focusing on core brands within the same business. After Pillsbury's sale, Burger King remained the only non-core business in Diageo's portfolio. (See Exhibit 3 for Diageo's segment data.) Burger King The U.S. restaurant industry was a $307 billion market in 2001, divided into four main segments: 1) quick service restaurants (QSR), 2) midscale, 3) casual dining and 4) fine dining. The QSR segment, of which Burger King was a part offered value-priced fast-food items such as hamburgers and french fries, chicken sandwiches, pizza, and Mexican food Unlike the highly fragmented full-service 2 John Willman, "Walsh Welcomed as New Chief of Diageo." Tire Firencial Times, October 8, 1999. Available from ProQuest ABI/Infom, http://proquest.com, acce 130, 2001 The regulatory process surrounding the sale of Pillsbury dragged on for many months, and the deal did not close until October 2001. By that time, the terms of the deal had changed again, although the total transaction value remained about 510.5 billion 2 This document is authorized for use only by Saqb Butt (sag 210201@hotmail.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies
