Diamond Foods Adds A New Facet

By Stephen D. Simpson, CFA | April 04, 2011 AAA

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.)

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