What the Pringles Deal Means for Kellogg
A week ago, Diamond Foods (NAS: DMND) clung to the hope that it might save a pending deal with Procter & Gamble (NYS: PG) to buy its Pringles business. Today, hope was lost as Kellogg (NYS: K) sweetened the deal for P&G by putting a $2.7 billion offer on the table. P&G's previous arrangement with Diamond was to sell the chip brand in an all-stock deal. Acquiring Pringles would have closed the gap between Diamond Foods and PepsiCo (NYS: PEP) , which is currently the world's largest snack maker. Given PepsiCo's existing monster portfolio of salty snacks and chips through Frito Lay, it's not surprising that they didn't step up to the plate and scoop up Pringles.
Unfortunately, the maker of Emerald Nuts lost the deal after an accounting scandal raised questions about payments to walnut growers. Diamond's loss is Kellogg's gain. Under the new terms, Kellogg plans to borrow $2 billion to purchase Pringles from P&G. Despite taking on debt, the acquisition could be a winning ingredient for Kellogg as it attempts to boost growth in foreign markets.
Pop the top on global markets
Pringles is an international sensation as far as snack brands go, with markets in over 140 countries and $1.5 billion in annual sales. The canned chips join Kellogg's growing portfolio of snacks, which include favorites like Keebler and Cheez-It crackers. Not only will the deal boost Kellogg's earning power in the snacks space, but also position the company as the runner-up to PepsiCo in the snack business.
The deal comes at a time when Kellogg's core cereal business is struggling to keep up with increased competition in the breakfast food segment. Strengthening the company's snack business should make Kellogg more competitive across the board. True, adding Pringles to the mix involves debt financing and reducing its share repurchase program for two years. But the long-term impact should be a win for Kellogg, as the deal will virtually triple the company's international snack business.
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At the time this article was published Foolish contributor Tamara Rutter owns shares of PepsiCo. Follow her on Twitter, where she uses the handle: @TamaraRutter. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo and Procter & Gamble. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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