Diamond Foods Foods, Inc. (DMND) and The Procter & Gamble Company (PG) signed a definitive agreement whereby Diamond Foods will acquire the Pringles chips business in a transaction worth $2.35 billion.

Pringles is expected to be accretive to earnings immediately and is expected to create maximum value for shareholders.

Pringles is the world’s largest potato crisp brand and is available in over 140 countries with manufacturing operations in the U.S., Europe and Asia.

Through this strategic agreement, Pringles will join Diamond Foods’ dynamic portfolio of brands, creating a premium snack-focused company with total revenues of approximately $2.4 billion. Pringles also brings with itself a significant global manufacturing and supply chain infrastructure.

After the merger, Diamond Foods’ snack business is expected to grow almost three times the current size, thereby increasing its scale in the U.S. grocery, mass merchandise, drug and convenience channels to gain greater merchandising and distribution influence. The merger is also expected to leverage Diamond Foods’ sales and distribution infrastructure and gain a broader global manufacturing and supply chain platform, with access into key growth markets around the world, including Asia, Latin America and Central Europe. This would ,in turn increase Diamond Foods geographic diversity, with international sales accounting for approximately 49% of total revenues.

PG expects the deal to go forward through a split-off transaction wherein PG shareholders can elect to participate in an exchange offer to exchange PG shares for shares of Diamond Foods.  Under the terms of a split-merge agreement, P&G will establish a separate entity to hold the Pringles business, which will be distributed to electing P&G shareholders in a tax-efficient transaction with a simultaneous merger with Diamond Foods. The total value of the deal is $2.35 billion, including $1.5 billion in Diamond Foods common stock, consisting of 29.1 million shares for approximately 57% of the outstanding shares of the combined company and the assumption of $850 million of Pringles debt. However, Diamond Foods current shareholders will continue to own approximately 43% of the combined company.

The deal being tax–efficient is expected to maximize value for PG shareholders while minimizing annual earnings dilution. The transaction is expected to generate a one-time earnings increase for PG of approximately $1.5 billion after tax or about 50 cents per share. However, on an annualized basis, PG expects only modest EPS dilution of 2 cents to 4 cents.

For fiscal 2012, Diamond Foods expects strong growth in its core business with earnings of $2.85 to $2.98 per share, reflecting an increase of 15% to 20%. However, combined results for Diamond Foods and the Pringles business for fiscal 2012 will depend on the actual closing date of the deal.  Expecting the transaction to closes by the end of 2011, approximately seven months of Pringles performance would be included. Therefore, for fiscal 2012 total net sales are projected at approximately $1.8 billion, while earnings (excluding one time items) are expected to be in the range of $3.00 to $3.10 per share, reflecting an accretion of 12 to 15 cents per share. In addition, the deal is also expected to significantly increase Diamond Foods cash flow.

Further, Diamond Foods expects to incur one-time costs of approximately $100 million pertaining to the transaction over the next two years. P&G will also provide Diamond Foods transition services for up to 12 months after closing.  

The combined business will be managed by Diamond Foods executive team and Board of Directors. The company’s headquarters will continue to remain in San Francisco, California.

The transaction is subject to approval by Diamond Foods shareholders and the satisfaction of customary closing conditions and regulatory approvals. 

 
DIAMOND FOODS (DMND): Free Stock Analysis Report
 
PROCTER & GAMBL (PG): Free Stock Analysis Report
 
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