Diamond Foods Rises After Agreeing to Buy P&G Pringles Brand

Diamond Foods Inc. (DMND) rose the most in four months after agreeing to buy Procter & Gamble Co. (PG)’s Pringles chip operations for $1.5 billion, more than tripling the size of its snack business.

The shares of the San Francisco-based snack maker rose 6.7 percent to $61.06 at 4 p.m. New York time in Nasdaq Stock Market trading, the most since December. They have risen 44 percent over the past twelve months, compared with a 12 percent gain for the Standard & Poor’s 500 index.

The Pringles brand, sold in more than 140 countries, will help Diamond increase its global scale and more than double its snack sales in the U.S. and the U.K. Getting rid of Pringles also allows P&G Chief Executive Officer Robert McDonald to devote more effort to the home and personal care businesses.

“This is a very good deal for shareholders, and the gain in share price recognizes that,” Tim Ramey, an analyst at D.A. Davidson & Co. in Lake Oswego, Oregon, said in an interview. “Pringles was an orphan brand within P&G, and it improves Diamond’s product mix dramatically, making it solidly a snack food company versus a commodity nut company.” He recommends buying Diamond shares.

Diamond will assume $850 million in Pringles debt, bringing the total value of the transaction to $2.35 billion, the companies said today. Diamond expects the purchase to close by the end of the year.

Profit Forecasts

If the deal closes by then, profit for the year ending July 2012 should be $3 to $3.10 a share, excluding items such as transaction costs. That compares with the $2.99 average of eight analysts surveyed by Bloomberg, and would be at least a 21 percent gain from the midpoint of the company’s 2011 earnings projection. Diamond plans to more than double the percentage of its sales from outside the U.S.

“Pringles will fit like a glove and take Diamond into a whole new and bigger league,” James Amoroso, an independent food industry consultant based in Walchwil, Switzerland, said in an e-mail. “Regardless of how successful P&G was with this business, it was always going to be a strange fit. Snacks has very different commercial dynamics.”

P&G fell 59 cents to $61.67 in New York Stock Exchange composite trading.

The two companies had discussed a transaction as far back as last year, people with direct knowledge of the discussions said then. P&G’s board decided against a deal in August over concerns about its structure. Today’s transaction will take the form of a “Reverse Morris Trust,” which allows P&G to sell in a more tax-efficient manner.

Mendes Takes Charge

Diamond CEO Michael J. Mendes will lead the combined company, which will have sales of about $2.4 billion. He has run the company since 1997. Pringles will make Diamond into the world’s second-biggest maker of savory snacks, trailing PepsiCo Inc.’s Frito-Lay unit. The company plans to increase Pringles’ sales in developing countries such as Brazil and China.

Pringles debuted in October 1968, according to a P&G website. The name came from a street in Finneytown, Ohio, because the word appealed to the company. Pringles expanded nationwide in 1975 and reached the U.K. in 1991. Outside the U.S., its flavors include seaweed and crab, sold in Asia, and prawn cocktail, sold in Europe.

“Pringles may not be the favorite brand of U.S. snackers, but it is a major brand elsewhere,” said Marcia Mogelonsky, an analyst at Mintel International in Chicago. “Diamond now has a clear pathway to emerging markets, analogous to Kraft’s purchase of Cadbury.” According to Mintel, more than two-thirds of Pringles’ new products debuted in Europe and Asia over the past two years.

Diamond’s other snacks include Pop Secret microwave popcorn, acquired from General Mills Inc. (GIS) for $190 million in 2008, and Kettle chips, purchased for $615 million last year. Diamond began as a walnut growers’ cooperative in California, and held an initial public offering in 2005.

Bank of America Corp. has committed to finance the deal, according to a regulatory filing today.

To contact the reporters on this story: Matthew Boyle in New York at mboyle20@bloomberg.net; Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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