Kellogg to Buy Procter & Gamble’s Pringles for $2.7 Billion
Bloomberg - Feb 16th 2012, 10:06
Kellogg Co. (K) agreed to acquire Procter & Gamble Co.’s Pringles potato chip business for about $2.7 billion in cash to triple its global snacks sales after a deal with Diamond Foods Inc. (DMND) fell through.
The transaction will reduce Kellogg’s earnings this year by as much as 16 cents a share, the Battle Creek, Michigan-based company said today in a statement. Procter & Gamble earlier today terminated a previous plan to sell Pringles to Diamond Foods, according to a separate statement.
The purchase gives Kellogg a brand with more than $1.5 billion in sales in 140 countries and a platform to grow in emerging markets. Kellogg Chief Executive Officer John Bryant said on a conference call that the company is working to boost its global snacks business, which includes Cheez-It, Townhouse crackers and Keebler.
“This is a great business that helps us create an even better global snacks business,” Bryant said in a phone interview today. “This is an irresistible asset at a good price. So we moved very quickly.”
Kellogg rose 5.1 percent to $52.87 at the close in New York. P&G, based in Cincinnati, increased 0.1 percent to $64.55. Diamond gained 5.2 percent to $23.46.
The purchase would be the largest in the U.S. diversified foods industry since Nestle SA acquired Kraft Foods Inc.’s (KFT) North American pizza business for $3.7 billion two years ago, according to data compiled by Bloomberg.
Global Snack Sales
Snack sales total $48 billion a year in developed markets and $15 billion in emerging markets, Kellogg said. Global snack sales have grown 4.3 percent a year from 2005 to 2010 in developed markets and 9.6 percent a year in emerging markets.
Kellogg expects to incur one-time costs of $160 million to $180 million from the acquisition. The company expects to generate $10 million in savings this year, more next year and then as much as $75 million annually thereafter.
The deal makes strategic sense for Kellogg, Alexia Howard, an analyst at Sanford C. Bernstein & Co. in New York, said in a research note today. While Kellogg said savings will equal 3 percent to 5 percent of sales, Howard estimates savings from large acquisitions average 8.3 percent of sales, so Kellogg could end up finding more benefits.
“When Kellogg bought Keebler a decade ago, it was an entirely domestic business,” Howard said. “As a result, Kellogg’s snacking business is relatively underdeveloped overseas.”
Diamond Foods had previously agreed to buy Pringles for $1.5 billion in stock and the assumption of $850 million in debt. The deal collapsed after Diamond Foods last week replaced its chief executive officer and restated earnings for the past two years after the board found payments to walnut growers had been booked in the wrong periods.
P&G told Kellogg and other interested parties, some of which were private-equity firms, several weeks ago to prepare bids, according to a person familiar with the process. The consumer-products company was seeking a deal that could close quickly and that employees would support to help make up for the uncertainty that had clouded the Diamond Foods tie-up, said the person, who declined to be identified as the negotiations weren’t public.
Kellogg didn’t participate in the previous bidding process that led to that deal, Bryant said. The Diamond deal was hard to compete with and Kellogg didn’t have as much focus on the global snacks business at the time, he said.
Kellogg Moved Quickly
The deal would value Pringles at about 11 times earnings before interest, taxes, depreciation and amortization. In 66 comparable deals globally since 2007, the median paid by buyers was about 7.6 times Ebitda, Bloomberg data show. There have been almost 1,000 transactions in diversified foods in the past five years, led by Kraft’s 2010 purchase of Cadbury Plc for more than $20 billion, including debt, according to Bloomberg data.
Kraft paid 14.5 times Ebitda for Cadbury, according to Bloomberg data.
Once it appeared that the Diamond deal could fall apart following the conclusion of an internal investigation last week, Kellogg moved quickly, Bryant said.
“We are always looking for acquisitions,” Bryant said.
Bryant said Kellogg will issue new debt for the acquisition. Barclays Plc (BARC) advised Kellogg, while Morgan Stanley advised P&G.
The purchase is expected to be completed later this year, the companies said. P&G said it expects an after-tax gain of $1.4 billion to $1.5 billion, or 47 cents a share to 50 cents a share.
P&G was able to divest a brand that the company wanted to sell as it focuses on its core business lines, said Jack Russo, an analyst at Edward Jones in Des Peres, Missouri.
“The good news here is that it’s over, it’s done and it gets them more focused on their core,” Russo said in a phone interview.
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