Diamond Foods Inc. (DMND) soared the most ever after a KeyBanc Capital Markets Inc. analyst said a probe into payments to walnut growers will wrap up quickly and not jeopardize the acquisition of Pringles from Procter & Gamble Co. (PG)
The San Francisco-based maker of Kettle chips and Emerald nuts rose 53 percent to $40.56 at the close in New York, the biggest increase since its initial public offering in July 2005.
The internal Diamond investigation into payments made to walnut growers will finish quickly and likely won’t prevent the completion of the Pringles deal, Akshay Jagdale, an analyst at KeyBanc in New York, said today in a note to investors.
“The investigation will reveal that Diamond has properly accounted for the various payments it made to its growers and expect the investigation to be wrapped up rather quickly,” said Jagdale, who recommends buying the shares. “We continue to believe that the Pringles deal will go through.”
Jagdale based his report on interviews with walnut growers as well as documents outlining Diamond’s payments, which he said proved that Diamond was not shifting payments from one period to another “to intentionally confuse farmers and ’massage’ earnings,” according to the note. KeyBanc also hired Robert Willens, a corporate tax consultant in New York, to analyze the payments. Willens concluded in the report that an earnings restatement was “highly unlikely.”
Diamond has no comment on the report, John Christiansen, a spokesman for the company, said in an e-mail.
Before today, the shares had slumped 59 percent since Nov. 1, when Diamond said that the probe would delay the acquisition of Pringles in a deal valued at $2.35 billion.
The company is scheduled to file its quarterly earnings report on Dec. 12. There is a “good chance” Diamond Foods will miss the filing deadline because of the investigation, Jagdale said in the report.
The Pringles deal would double Diamond’s annual sales to more than $2 billion. Diamond had planned to assume $850 million in debt from Pringles, and that could increase by as much as $200 million depending on the stock price, Diamond said when the deal was announced on April 5. The shares closed at $61.06 that day. Diamond had planned to complete the transaction by the end of the year, and postponed it to June 2012.
“The stock is already pricing in most of the bad news,” Jagdale said in the note.
The walnut business will represent about 10 percent of Diamond’s operating income after the Pringles deal, according to William Chappell, a SunTrust Robinson Humphrey analyst.
On Nov. 23, Diamond shares tumbled after CNBC reported that company director Joseph Silveira committed suicide Nov. 15. Silveira had served on the audit committee and recused himself from its investigation. He was 64.
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