UPDATE: Kellogg To Buy P&G's Pringles, Stepping In For Diamond

Kellogg Co. (K) agreed to buy Procter & Gamble Co.'s (PG) Pringles business for $2.695 billion in cash, stepping in for Diamond Foods Inc. (DMND), the troubled former suitor of the canned-chips operation.

Diamond had agreed to pay $2.35 billion to buy the Pringles business last April, but the parties said Wednesday that pact had been terminated. The deal unraveled following an internal probe at Diamond that found it had wrongly accounted for payments to walnut growers.

The purchase heightens the importance of snacks to Kellogg's overall business, bringing the category roughly up to par with cereal, which accounts for a little over half of Kellogg's revenue. Executives said the acquisition will also give the maker of Rice Krispies and Pop Tarts a stronger foothold in markets such as the Asia-Pacific region.

"We think it will be a great addition and a strong new platform on which we can grow," Kellogg President and Chief Executive John Bryant said on a conference call with analysts. "While Pringles operates in many regions, we will look to expand these businesses over time."

Kellogg predicted the Pringles purchase will cut its current-year per-share earnings by 11 cents to 16 cents, including costs tied to the deal and a planned reduction of its stock buyback program. The company is lowering share repurchases because of the issuance of $2 billion in debt to fund the deal.

Excluding costs and the impact of the lower buybacks, Kellogg expects the deal to add roughly 8 cents to 10 cents a share to its 2012 full-year earnings.

Kellogg shares were up 3.4% at $52 in recent premarket trading. Diamond rose 3.6% to $23.10 while P&G was up 2 cents at $64.50.

P&G and Diamond said Wednesday that no break-up or other fees will be paid in connection with the termination of their deal.

The accounting issues at Diamond marked a stunning comedown for the once-obscure walnut growers' cooperative, which under Chief Executive Michael J. Mendes tried to become a force in the snacks business through a series of acquisitions since 2005. Those efforts peaked

"Diamond has enjoyed a positive and constructive working relationship with P&G throughout this process, and the mutual termination of our agreement and release of all associated liabilities was reached in the same spirit," said Rick Wolford, Diamond Foods' acting president and chief executive. "Diamond now will put its full effort on the growth of our business with focused execution to continue to build our successful brands."

Last week Diamond fired its chief executive and chief financial officer and said it would restate financial results for two years in light of the probe.

The Wall Street Journal reported last week that the results of the probe--which was launched after the Journal raised accounting questions in September--would be turned over to the U.S. Securities and Exchange Commission and the San Francisco U.S. attorney's office, which have been investigating Diamond and how it handled the payments, citing a person familiar with the matter said.

The accounting controversy sprung out of California's walnut groves, which once sold the bulk of their output to Diamond. But the interests of growers and the company began to separate after the company began to answer to public shareholders. Growers have complained that Diamond, which sets walnut prices in secret and pays for crops in a series of payments months after they are delivered, began paying less than other buyers in recent years.

-By Matt Jarzemsky, Dow Jones Newswires; 212-416-2240; matthew.jarzemsky@dowjones.com

--Mia Lamar contributed to this story

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