P&G Walks Away From Foods, Sells Pringles For $2.35 Billion

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Procter & Gamble

Procter & Gamble (NYSE:PG) reached an agreement to offload Pringles, the last foods brand in its portfolio to Diamond Foods in a $1.5 billion stock transaction. The deal is expected to close by the end of 2011 and is structured to minimize the tax impact on P&G [1]. PG is the largest consumer goods company in the world, and traditionally competes with companies like Colgate (NYSE:CL), Unilever Group (NYSE:UL), Revlon (NYSE:REV) and L’Oreal (PINK:LRLCY) across a wide product spectrum.

What Does this Mean for Procter & Gamble?

  1. Exiting the food business lets P&G focus exclusively on high-growth and high-margin beauty and personal care brands. P&G’s divestures in foods include Jif and Crisco in 2002 for $810 million, Sunny Delight in 2004 for an undisclosed amount and recently Folgers in 2008 for $2.65 billion.
  2. With annual sales at around $1.2 billion, the spinoff hardly creates a dent in P&G’s robust portfolio with sales exceeding $80 billion. The nature of the transaction reduces P&G’s outstanding debt and also does not come with a tax hit on capital gains from the sale.
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What Does this Mean for Diamond Foods?

  1. Pringles is a strategic fit in Diamond Foods’ portfolio of Emerald nuts along with the recently acquired Pop Secret popcorn in 2008 for $190 million and Kettle chips in 2010 for $616 million.
  2. In the largely fragmented snacks market, the acquisition of Pringles triples Diamond Foods’ sales to $2.4 billion, making it the second largest player in the market led by PepsiCo’s Frito-Lay.
  3. The acquisition gives Diamond Foods a broader manufacturing base and supply chain stretching across the globe. Pringles brand crisps are sold in over 140 countries across the globe, with manufacturing operations in Europe and Asia. This gives Diamond Foods instant access for distribution of its other brands.

So, while P&G had been out trying to shed its last standing food brand, Diamond Foods had been out shopping for food brands to gain scale. Hence, the strategic fit is obvious.

Why this Structure for the Transaction?

A crucial aspect of the deal is its structure, which minimizes the tax burden on P&G shareholders. Pringles shall be split off into a separate entity, which shall then be merged with Diamond Foods. The new (combined) company will be led by Diamond Food’s Chief Executive Michael Mendes. P&G’s shareholders will end up owning 57% of the combined company while Diamond shareholders will own the rest. The non-cash nature of sale ensures no taxation on capital gains from the sale. Diamond Foods would assume the $850 million debt on Pringles and would also incur a one-time expense of $100 million spread over the next two years related to the transaction.

See our complete analysis of Procter & Gamble’s stock here

Correction: P&G’s shareholders that choose to elect to participate in the exchange offer will swap their shares for Diamond shares and will own part of the independent company that will be split off from P&G. P&G holders that elect to participate will end up owning 57% of the combined company while current Diamond shareholders will own the remainder. For more info, see P&G announcement.

Notes:
  1. Diamond Foods to Merge P&G’s Pringles Business into the Company, PR Newswire, April 5′ 2011 []