It was not that long ago when Diamond Foods (Nasdaq: DMND) was just a nut company with some clever commercials. Given the corporate maneuvers of the past few years, though, it is clear that management has goals and aspirations of becoming much more. With larger food companies apparently always on the lookout for ways to "manage" their brand portfolio, Tuesday's deal for Pringles may not be the last deal for this company.

Tutorial: The Basics Of Mergers And Acquisitions

The Terms of the Deal
Diamond Foods and Procter & Gamble (NYSE:PG) announced a deal whereby Diamond will acquire the Pringles brand and business in a somewhat convoluted split-off transaction called a reverse Morris Trust deal. Diamond will paying $2.35 billion for Pringles, with the deal to be structured around $1.5 billion of stock (29.1 million shares) and the assumption of $850 million in debt. There will be collars on the deal, though, that could move the debt portion up or down depending on the performance of DMND shares before the close of the deal.

As part of the deal terms, PG shareholders will have the option to exchange their shares in PG for DMND if they so choose. One way or another, current Diamond shareholders will own about 43% of the new company, so this clearly a large transaction for the company. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

What Diamond Is Getting
Pringles is a very well-known snack food brand and it should fit it in well with Diamond's existing portfolio of nuts, popcorn and potato chips. Based on management's commentary in the deal announcement, the Pringles business is expected to produce about $1.5 billion in revenue for the 2011 fiscal year, which ends at the end of July for Diamond Foods.

At that price, Diamond is paying a multiple that is relatively consistent with the valuation of packaged food companies like Kellogg (NYSE:K), Heinz (NYSE:HNZ) and General Mills (NYSE:GIS), to say nothing of Diamond's own multiple, though a bit of a premium to snack food companies like J&J Snack Foods (Nasdaq:JJSF) and Lance (Nasdaq:LNCE) - both of which Diamond will now vault ahead of in terms of sales. (For more, see America's Biggest Food Companies)

Both Companies Following Their Strategy
Tuesday's deal is very consistent with the recent history of both Diamond and P&G. Diamond bought Pop Secret from General Mills back in late 2008 and then acquired Kettle Foods in 2010. On the flip side, Procter & Gamble is increasingly shaving off businesses that do not fit with its core grooming and hygiene focus - having sold its pharmaceutical business to Warner Chilcott (Nasdaq:WCRX) and disposed of its Folgers coffee business through a reverse Morris Trust transaction with Smucker (NYSE:SJM) in 2008.

With this deal, P&G will no longer have any food business at all, and it seems like a fair bet that the company will look to find a buyer for its pet food business (which includes the Iams and Eukanuba brands). This is a relatively concentrated market, though, so there could be antitrust issues in selling to the likes of Nestle (Nasdaq:NSRGY), Colgate Palmolive (NYSE:CL) or Del Monte Foods (NYSE:DLM), though perhaps less problem selling to Mars - and no problem selling to a private equity buyer.

The Bottom Line
Although Diamond does not appear to be overpaying for Pringles, the sheer size of this deal makes it a bold move for the company. The reality, though, is long-term success in highly competitive markets requires bold moves. And while the size and scope of this deal likely means that Diamond will not be in the market again for a little while, it is likely not the last deal the company makes - particularly if management can find more large consumer goods companies looking to juggle their portfolios and sell off worthwhile brands. (For more, see Merger Monday Recap.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  3. Fundamental Analysis

    10 Major Companies Tied to the Apple Supply Chain

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  4. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  6. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  7. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  8. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  9. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  10. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!