February 15, 2012 / 12:27 PM / in 6 years

Kellogg to buy Pringles from P&G for $2.7 billion

(Reuters) - Kellogg Co agreed to buy Pringles potato chips from Procter & Gamble Co for $2.7 billion in a cash deal that will nearly triple the cereal maker’s international snack business.

Cans of Pringles are seen on display in New York April 5, 2011. REUTERS/Shannon Stapleton

The transaction will also let household goods maker P&G finally leave the food business after its agreement with Diamond Foods Inc fell apart.

Shares of Kellogg, which is aiming to expand a snack portfolio that already includes Keebler cookies, Cheez-It crackers and Kashi snack bars, rose 6 percent in Wednesday morning trading.

Adding Pringles chips to the mix will increase the size of Kellogg’s snack business to where it will account for as much of total revenue as its well-known cereal business, the world’s largest, with brands like Special K and Rice Krispies.

P&G had agreed to sell Pringles to Diamond Foods Inc last year, but that deal fell apart this month following the discovery of improper accounting that led Diamond to replace its chief executive and finance chief. The U.S. government is looking into Diamond’s accounting practices.

Diamond said on Wednesday that it does not have to pay any break-up fee, and its shares rose nearly 5 percent.

With Diamond’s future unknown, some analysts have begun to question the attractiveness of its snack food brands, Kettle potato chips and Pop Secret popcorn, to another buyer.

Kellogg Chief Executive John Bryant, in an interview with Reuters, declined to comment on his company’s interest in Diamond or any of its brands. He did admit, however, that Diamond’s brands made more strategic sense to Kellogg, now that it will become the world’s second-largest savory snack company behind PepsiCo Inc’s Frito-Lay.

“They’re clearly a fit in the portfolio. You could say our ability to do bolt-on acquisitions has probably expanded with the addition of this business,” Bryant said.

Plus, Pringles’ existing international distribution network can help lift sales of Kellogg’s other brands, said Bernstein analyst Alexia Howard.

“We believe that Kellogg will be able to generate meaningful revenue synergies, particularly in complementary regions where Pringles is relatively strong but Kellogg is weak, most notably Asia,” Howard wrote in a research note.

The companies expect the deal to close by this summer. Both companies declined to say when their discussions started.

But when an analyst asked Kellogg’s Bryant why his company did not buy Pringles when it was up for sale last year, he said it was hard to compete with the Diamond offer.

Also, Kellogg is now more interested in growing its international snack business than it had been, he said.

While Pringles was a revenue-driver for P&G, bringing in about $1.5 billion a year in sales, it was the only remaining food business and no longer fit in with the company’s focus on items such as beauty and personal care products.

In recent years, P&G also sold off its Folgers coffee business and Jif peanut butter.

In contrast, Pringles will be “center plate” for Kellogg, Bryant said, meaning that Kellogg could put more focus on Pringles than P&G had.

P&G said the deal would lead to an after-tax gain from the deal of $1.4 billion to $1.5 billion, or 47 cents to 50 cents per share, about the same amount estimated when it first announced the deal with Diamond in April 2011.

About 1,700 P&G employees will move to Kellogg.

Kellogg will borrow $2 billion to complete the deal and expects to limit its share repurchase program for about two years. Excluding one-time costs and the impact of reduced buybacks, the deal will add 8 to 10 cents per share to Kellogg’s earnings in 2012 and 22 cents to 25 cents in 2013, Kellogg said.

Including those items, the deal will lower Kellogg’s earnings per share in 2012 by 11 to 16 cents.

P&G said that if the deal gets done this fiscal year, it would earn $3.77 to $3.93 per share including the one-time gain from the deal.

Kellogg shares were up 6 percent at $53.34 in morning trading.

Reporting by Jessica Wohl in Cincinnati, Martinne Geller and Phil Wahba in New York; Editing by Lisa Von Ahn, Dave Zimmerman

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