Diageo

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Exhibit 1 Grand Metropolitan, Guinness and Diageo Financial Statements, (£ Millions).

GrandMet Guinness FY 97 PF FY 98 FY 99 FY 00
CY 97 PF CY 97 PF
Sales 8,045 4,539 12,985 12,029 11,795 11,870
Operating costs 6,978 3,584 10,982 10,659 10,278 10,088
Interest payable (net) 153 81 268 360 324 363
Associates (net) 5 71 89 112 95 121
Other (229) (320) (618) 478 94 (163)
Taxes 249 255 532 721 440 401
Net Income 441 370 674 879 942 976
Dividends 654 835 674 713

See Note FY98 FY99 FY00

Operating profits 1,866 1,966 2,043
Cash interest paid (net) (258) (432) j
Taxes paid (603) (566) (285)
Cash From Operations 1,005 968 1,353
Dividends from investments 120 58 64
Net capital sales (expenditures) (370) (444) (488)
Net divestitures (acquisitions) 1,368 121 487
Cash From Investments 1,118 (265) 63
Management of liquid resourcesa (600) 2,195 (219)
Dividends paid (695) (702) (710)
Paid in capital from shares issued (repurchased) (2,662) (1,336) (80)
New debt 2,097 (716) (544)
Cash From Financing (1,860) (559) (1,553)
Total change in cash 263 144 (137)

GrandMet Guinness
CY 97 PF CY 97 PF FY 97 PF FY 98 FY 99 FY 00
Assets
Cash and marketable securities 1,786 454 2,173 2,987 1,097 1,063
Accounts receivable 2,243 1,432 3,216 3,054 3,259 3,071
Inventory 995 1,909 2,374 2,236 2,202 2,139
Fixed assets 5,513 4,105 9,625 8,977 9,720 9,863
Total Assets 10,537 7,900 17,388 17,254 16,278 16,136

Liabilities and Owners Equity

Accounts payable 1,833 1,783 2,930 3,524 3,532 3,275
Short term debt 1,730 1,289 2,293 4,724 3,905 3,066
Long term debt 2,515 760 4,190 3,137 3,495 3,816
Other 463 167 674 705 753 694
Total Liabilities 6,541 3,999 10,087 12,090 11,685 10,851
Minority interests 416 131 530 535 567 574
Common stock 531 476 1,001 1,139 992 990
Retained earnings 3,049 3,294 5,770 3,490 3,034 3,721
Total Equity 3,996 3,901 7,301 5,164 4,593 5,285
Total Liabilities and Owners Equity 10,537 7,900 17,388 17,254 16,278 16,136
Shares Outstanding 2,119b 1,877b 3,880 3,402 3,397
Market Value of Equity 12,565 b
11,209 b
27,548 22,538 20,144
Source: Diageo Annual Reports, Datastream.

Notes: Both Grand Metropolitan and Guinness reported year-end results on a calendar year basis. After the merger, Diageo
established a fiscal year ending on June 30. The 1998 fiscal year overlaps calendar year 1997 by six months. Because the merger
occurred before the GrandMet and Guinness fiscal years were over, and after the Diageo 1997 fiscal year was over, the 1997 results
were pro forma. Historical pro forma cash flows were not required to be reported for GrandMet, Guinness and Diageo for 1997, and
were not calculated by Diageo after the merger.

a
Liquid financial assets such as cash could be held in short- or long-term investments. A positive number in “Management of liquid
resources” represented assets that were moved from short-term investments (“Cash”) to longer-term investments, such as bank
accounts that required withdrawal notices longer than one day.

b
As of December 16, 1997, the day before the merger closed.
Exhibit 2 Diageo segment breakdown (£ Millions).

Turnover CY 96 PF FY 97 PF FY 98 FY 99 FY 00
Class of business
Spirits and Wine 5,830 5,692 5,327 4,929 4,971
Beer 2,262 2,259 2,176 2,234 2,146
Packaged Food 3,784 3,755 3,654 3,757 3,812
Restaurants 877 879 869 875 941
Associates and othera 687 400 3 0 0
Total 13,440 12,985 12,029 11,795 11,870
Geographical Area
Europe 4,556 4,443 4,262 4,230 4,181
North America 5,790 5,718 5,619 5,656 5,639
Asia Pacific 1,260 1,226 915 777 886
Rest of World 1,147 1,198 1,230 1,132 1,164
Associates and othera 687 400 3 0 0
Total 13,440 12,985 12,029 11,795 11,870

Operating Profit CY 96 PF FY 97 PF FY 98 FY 99 FY 00
Class of business
Spirits and Wine 1,138 1,135 1,070 967 1,002
Beer 254 264 247 273 284
Packaged Food 412 423 447 478 492
Restaurants 161 160 179 185 202
Associates and othera 36 21 (1) 0 0
Total 2,001 2,003 1,942 1,903 1,980
Geographical Area
Europe 543 552 534 594 585
North America 913 901 938 936 956
Asia Pacific 251 261 174 131 170
Rest of World 258 268 297 242 269
Associates and othera 36 21 (1) 0 0
Total 2,001 2,003 1,942 1,903 1,980

Source: Diageo Annual Reports

a
An associate was an undertaking in which the group had a long term equity interest and over which it exercises significant
influence. The group’s interest in the net assets of associates, other than goodwill, was included in investments in the group
balance sheet. Joint arrangements where each party had its own separate interest in particular risks and rewards were
accounted for by including the attributable share of the assets and liabilities, measured according to the terms of the
arrangement. “Other” included discontinued operations.

1996 and 1997 results reflect the pro forma results for Grand Metropolitan and Guinness combined
Exhibit 4 Selected financial data on companies with which Diageo compared itself, as of latest annual reporting period before October 2000 (in local currency unless otherwise noted).

Alcohol Beer Beverage Packaged Food Restaurants Consumer Conglomerate

Allied Pernod Anheuser Coca- Campbell General Tricon Global Colgate- Philip Procter &
Company Diageo Domecq Ricard Busch Carlsberg Heineken Cola Pepsico Soup Mills Heinz Kellogg Nestle McDonalds Restaurants Palmolive Gillette Morris Gamble Seagram Unilever
Domicile UK UK France US Denmark Netherlands US US US US US US Switzerland US US US US US US US UK
Employees ('000) 72 40 14 24 18 37 37 118 22 11 47 15 231 314 210 37 40 137 110 34 255
Market capitalization (MM) 20,292 3,416 3,203 32,681 16,245 15,184 143,969 51,289 11,634 11,534 11,813 12,493 112,032 54,454 5,832 37,626 43,865 53,786 74,761 25,352 13,262
Market capitalization ($ MM) 30,720 4,970 3,210 32,681 2,327 15,219 143,969 51,289 11,634 11,534 11,813 12,493 69,988 54,454 5,832 37,626 43,865 53,786 74,761 25,352 21,374
Enterprise valuea (MM) 27,113 4,780 4,388 37,804 23,727 15,955 150,196 54,334 14,725 14,794 15,925 14,627 124,904 61,706 8,340 40,416 48,594 68,254 86,887 33,229 16,239
Enterprise value ($ MM) 41,046 6,955 4,398 35,344 3,399 15,992 150,196 54,334 14,725 14,794 15,925 14,627 78,029 61,706 8,340 40,416 48,594 68,254 86,887 33,229 26,172
Price / Earnings ratio 20.8 x 10.8 x 13.7 x 23.3 x 14.0 x 29.4 x 59.2 x 25.0 x 16.3 x 18.9 x 13.3 x 36.9 x 23.7 x 28.0 x 9.3 x 40.1 x 34.8 x 7.0 x 21.1 x 1690.1 x 7.3 x
Market / Book ratio 4.3 x 18.0 x 1.6 x 8.3 x 1.6 x 5.8 x 15.1 x 7.5 x 84.9 x -39.9 x 7.4 x 15.4 x 4.6 x 5.3 x -10.4 x 20.5 x 12.8 x 3.5 x 6.1 x 2.1 x 2.7 x
Enterprise Value / EBITb 13.7 x 11.4 x 11.8 x 16.4 x 14.2 x 20.0 x 31.3 x 18.8 x 11.3 x 13.5 x 11.8 x 13.6 x 15.8 x 19.2 x 9.3 x 25.8 x 23.1 x 5.0 x 12.8 x 47.9 x 5.7 x
Interest Coverage c
5.0 x 5.7 x 10.4 x 10.6 x 4.1 x 15.3 x 15.5 x 10.8 x 7.3 x 7.8 x 6.2 x 10.7 x 7.4 x 9.9 x 5.9 x 8.5 x 18.6 x 14.1 x 12.4 x 2.4 x 12.2 x
EBITDA / Total Debtd 34% 35% 40% 60% 40% 159% 84% 129% 48% 40% 40% 64% 85% 56% 51% 68% 53% 107% 74% 22% 121%
Book gearing e
59% 88% 36% 57% 42% 23% 40% 31% 96% 110% 72% 72% 34% 41% 129% 60% 58% 49% 50% 39% 38%
Market gearingf 25% 29% 27% 14% 32% 5% 4% 6% 21% 22% 26% 15% 10% 12% 30% 7% 10% 21% 14% 24% 18%
ROA g
15% 17% 39% 24% 10% 20% 24% 22% 29% 29% 19% 28% 18% 19% 32% 26% 21% 25% 26% 5% 21%
Credit ratingh A+ A- NR A+ BBB AAA A+ A AA- A+ A+ AA AAA AA BB A AA A AA BBB- A+
Betai 0.55 0.51 0.54 0.46 0.4 0.54 0.68 1.07 0.49 0.47 0.49 0.37 0.9 0.81 0.42 1.29 1.03 0.34 0.37 1.02 0.77
ROEj 22.3% 25.7% 22.3% 34.5% 11.6% 13.4% 27.1% 30.9% 383.90% -986.2% 52.4% 39.7% 19.9% 20.40% -72.8% 47.2% 33.8% 48.7% 28.8% 1.0% 45.2%
Dividends Paid (MM) 713 116 0 545 256 125 1,580 784 382 328 514 389 1,693 265 0 345 642 4,393 1,681 287 820
CapEx (MM) 547 87 112 865 2,024 441 1,069 1,118 200 268 452 266 2,806 1,868 470 373 932 1,749 3,018 607 865
Exchange rate multiplierk to $ 1.514 1.455 1.002 1 0.143 1.002 1 1 1 1 1 1 0.625 1 1 1 1 1 1 1 1.612

Sources: Bloomberg, Compustat and GlobalVantage

Notes: a Enterprise value is the market value of equity plus book value of short-term and long-term debt. b EBIT is the Earnings Before Interest and Taxes. c Interest coverage is defined as EBITDA/interest expense. d EBITDA is the Earnings Before Interest, Taxes, Depreciation and Amortization. e Book gearing is defined as long-
term plus short-term debt divided by the book value of capital (short-term plus long-term debt plus shareholder equity). f Market gearing is defined as long-term plus short-term debt divided by the book value of debt plus the market value of equity. g ROA is the Return on Assets, defined as the EBITDA/Assets. h Standard and
Poor’s rating. i Beta is calculated using weekly returns over the two-year period ending June 30, 2000. j Return on Equity. k The number of US dollars = foreign currency x exchange rate.
Exhibit 5 Selected data on bond market for 5-year notes, October 31, 2000.

Rating Interest Interest Median Issuing Average Minimum Maximum

rate rate interest firms with monthly monthly monthly
(Pounds) (Dollars) coveragea rating issuance issuance issuance
($ Billion) ($ Billion) ($ Billion)
UK Government 5.56% - - - - - -
US Government - 5.83% - - - - -
AAA 6.13% 6.76% 30.07 4% 3.64 0.53 11.08
AA 6.37% 6.81% 11.37 13% 3.25 0 23.63
A 6.76% 7.15% 8.34 25% 6.47 0.69 30.65
BBB 7.16% 7.57% 4.94 22% 1.76 0.09 8.73

Sources: Bloomberg, Securities Data Corporation, Standard and Poor’s “Ratings Performance 1999: Stability and Transition.”

Note: Monthly issuance data collected between January 1, 1998, and October 31, 2000, for dollar denominated bonds in the US.
The global market for dollar denominated bonds was about half the size of the US market. Issuers, however, tended to be higher
rated firms or governments, and the individual issue sizes larger, relative to the US market.

a
Interest coverage defined as EBITDA/interest expense.
Exhibit 7A Industry returns on assets (EBITDA / Assets), with Diageo mix of businesses.

Volatility of Average of
Firms in Average Max Median Min industry firm
Industry composite ROA ROA ROA ROA ROAc volatilityd
Spirits 6 16.9% 24.2% 16.7% 12.6% 2.3% 3.4%
Beer 1 20.6% 27.2% 21.2% 14.3% 3.0% -
Food 4 19.8% 25.8% 19.8% 12.5% 3.1% 3.6%
Fast Food 2 21.0% 29.6% 19.9% 14.1% 3.6% 4.4%
Weighted Averagea - 19.7% 26.7% 19.5% 16.3% 1.9% -
Weighted Avg (Beverages) b
- 17.7% 24.9% 17.2% 15.1% 1.9% -

Source: Diageo

a
The Weighted Average weights the segment performance by the weight of that division within Diageo.

b
The Weighted Avg (Beverages) uses weights that exclude the packaged and fast food categories.

c
The ROA was calculated for the industry for each year in the sample. The volatility of industry ROA was calculated as the standard
deviation of the time series.

d
Calculated by taking the arithmetic average of the volatility (standard deviation) of each firm’s ROA over the sample period.
Exhibit 7B Median industry returns on assets, 1950-1999.

Mean Mean
Industry N ROA Volatility Industry N ROA Volatility
Food 155 15.4% 1.7% Extractive Industries 41 15.5% 2.8%
Textiles / Printing 335 15.2% 2.0% Utilities 194 11.7% 2.9%
Retail 544 13.2% 2.2% Durable Manufacturing 1,187 14.2% 3.6%
Transportation 266 14.3% 2.2% Real Estate / Insurance 197 7.6% 3.8%
Services 395 12.7% 2.2% Pharmaceuticals 119 20.7% 4.8%
Chemicals 132 16.6% 2.4% Computers 413 15.0% 4.8%
Financial Institutions 410 3.9% 2.5% Mining / Construction 337 11.0% 5.0%

Source: Casewriter calculations based on Center for Research in Security Prices data with 239,126 observations over 50 years.
 1. Comparable Multiples Valuation (EV/EBIT) – Using Averages

Step 1: Peer group and average EV/EBIT multiples (from Exhibit 4)

Segment Allied Domecq Pernod Ricard Average

Spirits & Wine 11.4 11.8 11.6

Segment Anheuser Busch Carlsberg Heineken Average

Beer 16.4 14.2 20 16.9

Segment Campbell Soup General Mills Heinz Kellogg

Packaged Food 11.3 13.5 11.8 13.6

Segment McDonalds Tricon Global Restaurants Average

Restaurants 19.2 9.3 14.3

Step 2: Diageo segment weights (FY00 Turnover, Exhibit 2)

Segment Turnover (£m) % of Total

Spirits & Wine 4971.00 41.9%
Beer 2146.00 18.1%
Packaged Food 3812.00 32.1%

Restaurants 941.00 7.9%

Total 11870.00

Step 3: Weighted average EV/EBIT multiple

eighted Average EV/EBIT 13.3

EBIT 2,043
EV 27123

Step 5: Subtract Net Debt

Item £m
Short-term
3,066
debt
Long-term
3,816
debt
Total Debt 6,882
Cash 1,063
Net Debt 5,819
Market Value
of Equity
21,304

2. Two-stage Discounted Cash Flow (DCF) model to the firm (FCFF approach).
 I. INPUTS FROM EXCEL FILE (FY00 BASE YEAR)

Item Value (£m) Source

EBIT
Exhibit 1 – “Operating
(Operating 2,043
profits”
Profit)
Tax rate 27% Case instruction

Depreciation Derived: EBITDA/Total Debt

& = 34% (Exhibit 4) → EBITDA
297
Amortisation = 0.34 × 6,882 = 2,340 →
(D&A) D&A = 2,340 – 2,043

Capital
Exhibit 1 – “Net capital sales
Expenditures -488
(expenditures)” = (488)
(CapEx)

Δ Net Working Calculated: NWC FY99 =

Capital 6 1,929 → FY00 = 1,935 → Δ =
(ΔNWC) +6

ST debt 3,066 + LT debt 3,816

Net Debt 5,819
– Cash 1,063
Shares
Outstanding ( 3,397 Exhibit 1
Million)

II. KEY ASSUMPTIONS

Assumptio
Value Justification
n
Slightly above historical
Short-term EBIT growth (~4.6%
FCF growth 5% FY98–00); assumes
(Years 1–5) modest sales recovery
and margin stability.
Long-run nominal
Terminal growth = real GDP
growth 2% (~1%) + inflation (~1%);
rate (g) conservative for mature
consumer staples.
Risk
5% Assumption
Premium
WACC #VALUE!

III. STEP-BY-STEP CALCULATION (Using WACC = 7.45%)

NOPAT 1491.4
FCFF₀ 1294.3

Year 1 2 3 4
 FCFF 1359.0 1426.9 1498.3 1573.2
∑ PV(FCFF₁–₅) #VALUE!
PV(TV) #VALUE!
Enterprise Value #VALUE!
Equity Value #VALUE!
Share Price #VALUE!
 Nestle Average
15.8 13.2

(FCFF approach).
 Debt 6 882
Equity 20,144

Rd 6.76%

Re 8.31%

Wd #VALUE!
We #VALUE!

5 TV
1651.9 #VALUE!