Kellogg wins Pringles after Diamond deal falls apart

The Kellogg Company said on Wednesday that it would buy Pringles for about $2.7bn in cash, swooping in on the snack company after an earlier agreement with Diamond Foods fell apart.

The deal will add a prominent brand to existing Kellogg snack offerings Keebler and Cheez-It, helping the company increase its presence in snacks. Beginning with its $4.5bn purchase of Keebler in 2000, Kellogg has tried to reduce its reliance on its mainstay cereal business, which includes Corn Flakes and Rice Krispies.

The snack business is growing faster and has greater appeal internationally. In a conference call with analysts, Kellogg's chief executive, John A. Bryant, said that Pringles, known for its signature canned potato snacks, is in 140 countries and offers "the potential for increased scale in Europe and a good entry point into snacking in Asia and Latin America." Pringles generates about $1.5bn in annual sales.

Wednesday's deal also provides some relief for Pringles' parent, Procter & Gamble, which agreed last spring to sell the business to Diamond for $2.4bn in stock. It was forced to re-evaluate its plans after Diamond began facing criticism over questionable payouts to its walnut farmers.

Last week, Diamond said it would restate two years' worth of financial statements and put its chief executive on administrative leave. Within hours, Procter & Gamble said it might have to consider alternatives for Pringles.

Kellogg was interested in Pringles last year, but it felt hard-pressed to compete with the lesser tax bill that would accompany Diamond's bid, Mr. Bryant of Kellogg said in an interview.

With the collapse of Diamond's offer, Kellogg and Procter & Gamble cobbled together a deal within a matter of days, Mr. Bryant said. "It's an exciting asset and an iconic brand," he said. "We moved very quickly."

The deal is expected to close by the end of June.

The move will nearly triple Kellogg's overseas snacks business. Kellogg executives expect Pringles to add 8 cents to 10 cents to its earnings for each share this year, excluding costs related to the deal. They also hope to achieve at least $10m in cost savings this year, a number that they expect to increase.

Investors appeared to applaud the deal, pushing shares of Kellogg up 5.1% to $52.87, on Wednesday.

"The company already has a dominant position in the snacks category, including fruit snacks, granola bars, cookies, crackers, etc.," analysts with Stifel Nicolaus wrote in a research note. "Pringles will simply add to this dominant market share position in these important growth categories."

Analysts at Jefferies & Company, however, were more skeptical, writing that "we find ourselves less than enthralled with the strategy behind purchasing a domestically tired brand that appears somewhat out of sync with the trends toward better-for-you snacking."

Mr. Bryant told analysts on Wednesday that while Pringles had lower margins than other Kellogg businesses, the company had demonstrated a good track record of improving the operations of its acquisitions.

Kellogg plans to pay for the deal with about $2bn in debt financing and with cash on hand, including money held in overseas subsidiaries. But Mr. Bryant said that the growth projections, as well as the availability of cheap financing, made the deal obvious.

Kellogg was advised by Barclays Capital and the law firm Wachtell, Lipton, Rosen & Katz. Procter & Gamble was advised by Morgan Stanley and the law firm Jones Day.

(Published by NY Times - February 15, 2012)