Nuts for Chips: Diamond Buys Premium Snack-Maker Kettle


Back in 2006, British private-equity firm Lion Capital agreed to purchase Kettle Foods, a premium salty snack company. While the price tag was not disclosed, it was estimated at between $280 million to $320 million. That year, the company had posted roughly $150 million in revenues and was benefiting from the trend towards healthier foods.

Now, Lion has decided to get liquidity on its investment by selling Kettle to Diamond Foods (DMND) for $615 million in cash. To finance the deal, the company will use a five-year, $600 million credit facility, cash on hand and an equity offering (which is likely to be in excess of $100 million). In today's trading, Diamond shares are off about 3.5%.

Popular Premium Potato Products

In the late 1970s, Kettle Foods started as a small business selling roasted nuts and nut butters. But it was in 1982 that it found its groove and started to sell its hallmark potato chips, which have a distinctive gold color. Made with fresh, all-natural ingredients, the chips were a hit -- and also showed that healthy foods could be tasty.

Since then, the company has continued its innovative ways, adding flavors such as Backyard BBQ, Spicy Thai and New York Cheddar. The result is that Kettle has skillfully created a premium brand.

But to scale up the company, outside resources were needed. With the buyout from Lion, Kettle had access to more capital and was able to expand its capacity, opening a new manufacturing plant in Wisconsin.

As the Kettle's growth continued, it certainly became attractive to other food makers, making a buyout from an operator like Diamond seem inevitable. With the deal, Diamond will double its snack business -- adding $250 million in revenues -- and there are likely to be cross-marketing opportunities with its products, such as its Emerald and Pop Secret brands. Moreover, the transaction is expected to be accretive to earnings in the first year.

Diamond Knows How To Manage Growth

Diamond Foods is no stranger to deal-making. In August 2008, the company struck a $190 million deal for Pop Secret, which was then owned by General Mills (GIS). That turned out to be a smart move, as it added another leading brand to Diamond's portfolio.

More importantly, Diamond has demonstrated it knows how to manage a growing food company. From 2003 to 2009, revenues jumped from $154 million to $465 million (according to the investor presentation). Margins have also expanded nicely, going from 2.8% in 2006 to 8% last year.

And the growth should continue. Based on its quarterly report, which came out Thursday, Diamond boosted its outlook: For fiscal year 2010, the company forecasts sales of $595 million to $610 million, up from the previous guidance of $585 million to $605 million. Earnings per share are expected at $1.79 to $1.83.

And once the Kettle acquisition is fully integrated, there should be even more momentum. After all, the market for potato chips in the U.S. and U.K. is roughly $9 billion annually and is still growing.