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UK: Diageo clinches Burger King deal

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Diageo has finally sealed an agreement to sell its fast food chain Burger King and taken its final, significant step in realising its dream of becoming a fully drinks-focussed business.

The company announced the sale of Burger King Corporation under revised terms to the buying group composed of Texas Pacific Group (TPG), Bain Capital Partners and Goldman Sachs Capital Partners, this morning.

The company said that the transaction is expected to close later today when the purchase price of $1.5 billion is received. The sum is considerably less than an initial agreement between the two parties, which fell apart mid November.

Diageo said in a statement: "Diageo announced on 18 November 2002 that the buying group would not be able to complete the transaction on the terms agreed and announced on 25 July 2002. This was due to the highly competitive trading environment in which Burger King and other quick service restaurant businesses are currently operating and the deterioration in the capital markets."

The purchase price will be settled in part by cash, by US$86m in assumed debt and the balance by means of subordinated debt with a principal amount of $212.5m.

Diageo said the the cash portion of the purchase price reflects agreed adjustments for working capital and capital expenditure of Burger King and its subsidiaries. These variations are subject to the normal post-closing settlements, which are not expected to result in material changes to the cash received. Diageo is receiving $1.2 billion in cash.  However Diageo is obliged to ensure that at completion Burger King has $65 million in cash.

Such has been the tough nature of the negotiations and Diageo's willingness to sell that the company has agreed to guarantee US$750m of senior loans a US$100m revolving credit facility for Burger King.
Diageo said the arrangements are structured in such a way as to encourage the Burger King group to refinance these loans on a non-guaranteed basis before their contractual maturity. If refinancing does not occur in the first 3 years Diageo will receive thereafter an annual guarantee fee of 5% of the outstanding principal amounts of the loans. Diageo will also make an incentive payment of US$10m if the loans are refinanced during the first 18 months following closing or a payment of  US$5m if they are refinanced during the next 18 months. T

Announcing the agreement, Paul Walsh, CEO of Diageo, said: 'We are pleased that we have been able to reach this agreement despite a difficult market and at a time of tough trading conditions for the quick service restaurant sector.  We continued to review our options but concluded that this transaction with this buying group was the most certain route to achieving separation. Securing separation represents the best option through which Diageo can further realise value for its shareholders.

"The sale of Burger King represents an important step for Diageo in delivering its strategy, laid out in 2000, to focus on its premium drinks business. Since that time, Diageo has concluded major transactions to realign the strategic focus of the group, including the sale of Pillsbury to General Mills and the acquisition, jointly with Pernod Ricard, of the Seagram's spirits and wine business. Diageo is now well positioned to deliver superior levels of growth and return on invested capital."


Companies: Diageo, Pernod Ricard

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