Kellogg Pops As Diamond Stops in Pursuit for Pringles

Joel Anderson  |

At last, Pringles has a home. The chip brand, owned by Procter & Gamble (PG), was set to be purchased by Diamond Foods (DMND) last year only to have the deal fall apart after a scandal involving Diamond making improper payments to walnut farmers as part of an accounting cover-up. Now, Pringles has found a new home with the Kellogg Company (K).

Kellogg's decision to purchase Pringles in the aftermath of the failed Diamond deal represents an opportunity to move more firmly into the snack food segment. Kellogg is paying $2.7 billion for the chip brand which it intends to add to its portfolio of brands. While Kellogg has long been a staple in breakfast cereals, the company also has some popular brands in the savory snack food game, including Keebler, Cheez-It, and Townhouse. Pringles would immediately become Kellogg's second-biggest brand behind Special K cereal, and Kellogg will become the second-largest snack food company in the world behind PepsiCo's (PEP) Frito Lays.

“Pringles has an extensive global footprint that catapults Kellogg to the number two position in the worldwide savory snacks category, helping us achieve our objective of becoming a truly global cereal and snacks company,” Kellogg's CEO John Bryant said in a statement.

Of course, Diamond Foods was also poised to rise to number two in the snack foods game when it was expected to purchase Pringles, but it was not meant to be. The long saga of Diamond's efforts to purchase Pringles appears to finally be coming to a close, but it's been a roller-coaster ride along the way. The trouble began with reports that the company had made improper payments to walnut farmers in order to make the company's balance sheet look more attractive. The scandal led to a major sell-off that was followed by another major sell-off after a member of the internal committee investigating the scandal committed suicide.

Last Thursday revealed another level of suffering to the plight of Diamond shareholders when the company announced that CEO Michael Mendes and CFO Steven Neil were both placed on administrative leave and that the company would need to refile its 2010 and 2011 financial statements. Share went into freefall, losing another 37 percent.

The sale of the Pringles brand is most likely going to mean good things for both parties. Procter & Gamble will have completed the sell-off of its food brands while Kellogg will have obtained a brand that should help it expand the rest of its brand portfolio into new markets.

"We believe that Kellogg will be able to generate meaningful revenue synergies, particularly in complementary regions where Pringles is relatively strong but Kellogg is weak, most notably Asia," Bernstein analyst Alexia Howard wrote in a research note.

Kellogg will be borrowing some $2 billion to complete the deal, which should limit its share repurchase program for the next two years, but it expects add $0.08 to $0.10 per share to Kellogg's earnings in 2012 and $0.22 to $0.25 per share in 2013.

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