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Pillsbury Says It Will Spin Off Burger King; Grand Met Is Critical

November 8, 1988

MINNEAPOLIS (AP) _ Pillsbury Co. said Monday it will spin off its troubled Burger King subsidiary under a plan the company says is better for shareholders than the $5.23 billion takeover bid launched by Britain’s Grand Metropolitan PLC.

The announcement met with criticism from Grand Met and sparked skepticism among analysts but it also coincided with a favorable court ruling for Pillsbury in which a Delaware judge upheld Pillsbury’s ″poison pill″ defense.

Grand Met had asked retired Justice William Duffy in Delaware Chancery Court to prevent Pillsbury from invoking the defense, which makes a takeover more expensive. One of the conditions of Grand Met’s $60-a-share tender offer is for the ″poison pill″ to be lifted.

But Duffy on Monday sided with Pillsbury, saying the company’s board of directors was abiding by its fiduciary responsibilities in keeping the plan in place.

Ian Martin, chief of Grand Met’s U.S. operations, said lawyers for the British liquor and gaming conglomerate have asked Duffy to reconsider his ruling because it did not take into consideration Pillsbury’s plan to spin off Burger King.

Steve Carnes, a former Pillsbury executive who is an analyst for Piper Jaffray & Hopwood Inc. in Minneapolis, said Duffy’s decision provided one of the brightest moments for Pillsbury since Grand Met launched its hostile takeover Oct. 4.

″They were kind of in the depths of doom,″ Carnes said. ″... It becomes a moral victory and the moral victory could lead to further victory.″

In trading on the New York Stock Exchange, Pillsbury fell $1.37 to $59 a share.

Carnes said Grand Met may extend the expiration date on the tender offer.

Meanwhile, Martin said he was ″astounded that Pillsbury has chosen to break up the company instead of pursuing Grand Met’s″ offer.

Under the plan approved by Pillsbury’s board of directors, Burger King would be spun off to its shareholders as a separate public company.

Analysts have said the 5,500-restaurant chain could fetch as much as $2 billion if Pillsbury chose to sell it to an outside party. Grand Met has said it would keep the chain despite its troubles.

Pillsbury said it would distribute one share of Burger King common stock for each share of Pillsbury common stock, payable on Jan. 27 or earlier for shareholders of record on Dec. 2.

In addition, the company said Burger King would declare special dividends of cash and securities payable after the spin-off. The size of the special dividends was not disclosed.

While Pillsbury has the right to cancel the dividends, the company noted the payout would provide ″immediate value to shareholders while at the same time allowing Burger King to grow and develop values in the future.″

Pillsbury’s board also directed management to ″continue to explore additional ways to enhance shareholder values.″

Last month the board rejected Grand Met’s takeover bid as inadequate, and on Monday the food and restaurant giant repeated its plea that shareholders not tender their stock to the British company.

″We refuse to let Grand Met prematurely deprive shareholders of future value and the rewards of their investments,″ Pillsbury Chairman Philip Smith said. ″We firmly believe that the spin-off of Burger King and the other actions which may be authorized by the board offer shareholders greater rewards than does Grand Met’s offer.″

Carnes and analyst Malcom Knapp, who heads his own firm in New York, said the plan would add debt to an already troubled Burger King, making a turnaround of the world’s second-largest restaurant chain less likely.

″I think it’s a terrible idea. Kill it,″ Knapp said. ″It’s a desperate thing. It doesn’t make any sense.″

″It puts Burger King under the gun again,″ Carnes said. ″Maybe it would be weaker than it already is.″

Carnes estimated the combined value of one share of Burger King stock and one share of Pillsbury stock would be about $40. But he also said the breakup could make Pillsbury more attractive to a friendly third party.

Burger King accounts for about one-third of Pillsbury’s sales and about two-thirds of its profits but has not done well recently. In the latest fiscal year ended May 31, the chain’s pre-tax profits plunged more than 50 percent, to $48.2 million.

The company’s stagnant sales have been blamed in part on inconsistent advertising. Burger King dumped its advertising agency, J. Walter Thompson, last fall after an association of 11 years.

Burger King Chairman Jerry W. Levin acknowledged the marketing problems but praised the new business arrangement at a news conference in Miami, where the chain is based.

″We think it makes us best equipped to create a full turnaround for Burger King,″ he said.

Smith said the remaining operations of Pillsbury will be streamlined, with its well-known brands becoming its principal business. Products included in Pillsbury’s packaged foods unit are Green Giant vegetables and Haagen-Dazs ice cream, among others.

″As two separate, focused companies, Pillsbury and Burger King will each be in a better position to develop greater recognition in the marketplace,″ Smith said.

He said more information about the plan would be mailed to shareholders in ″the next several weeks.″ Additional steps to enhance shareholder value will be announced soon, the company said.

Grand Met’s Martin said Pillsbury’s plan is ″vague and does not contain sufficient information to evaluate the separate Pillsbury and Burger King companies.″

He said debt resulting from the plan would weaken both companies, possibly leading to large-scale layoffs, plant closings and a reduction in philanthropy, Martin said.

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