How Has Diageo Historically Managed Its Capital Structure? How Has Its Past Strategy Compared to Other Firms in Similar or Related Industries?

Summarize the key issues and facts in the case?

Diageo’s goal is to become an industry leader by achieving cost savings through marketing synergies, cutting overhead expenses, and developing production and purchasing efficiencies. Diageo intends to sell its packed food subsidiary, Pillsbury to General Mills and also considers selling 20% of its Burger King subsidiary through an initial public offering. The company’s intention behind this strategy is to raise funds to purchase other leading beverage alcohol companies without taking on excessive debt, thereby exclusively focus on beverage alcohol industry and also becoming a market leader in the industry. The company’s capital structure strategy was crucially important in terms of credit rating and predicting financial distress, and the company intended to maintain the highest rating possible to keep debt maintenance costs down.

How has Diageo historically managed its capital structure? How has its past strategy compared to other firms in similar or related industries?

Diageo manages its capital structure with the help of debts and equity in which major part was covered by debt portion. They have been using this policy since their merger to maintain its high crediting rating in the market. Prior to the merger their credit rating was AA and A respectively, then later after merger their ranking moved to A+. Diageo wanted to continue the same strategy in future by maintaining the interest coverage ratio between 5 to 8 times and EBITDA as a percentage of total debts by 30% to 35%.

Looking at the same ratio, competitors' EBITDA/Total Debt ratios are higher compared to Diageo's (35% and above). This capital structure that Diageo had was considered to be very conservative compared to the same industry competitors. The competitors that made a good comparison were Anheuser Busch, it