DMND (MM)

Kellogg Company (K) cleverly sneaked in and made good use of the fuss between Procter & Gamble Company (PG) and Diamond Foods Inc (DMND) as it grabbed the Pringles deal from P&G for $2.77 billion. The transaction is expected to close by the end of June this year.

P&G was supposed to sell its Pringles brand of potato snack to Diamond Foods for $2.4 billion. However, the retail giant refrained from handing over its brand after Diamond Foods’ reputation was stigmatized with the allegation that it had misappropriated the payouts of walnut workers.

The Pringles deal will shore up Kellogg’s overseas business and increase returns from its snacks by almost three times. The buyout is expected to strengthen sales in Europe and mark a forceful entry for the retail giant to Asia and Latin America. The snacks business is booming with the increasing appetite for on-the-go foods worldwide, particularly in emerging markets like China and India.

Kellogg, which till now was most popular at the breakfast table with its offerings of Frosted Flakes and Eggo frozen waffles, now also becomes a strong player in the savory salty snacks business, second only to PepsiCo International (PEP). Moreover, the Pringles buyout is likely to reduce Kellogg’s dependence on its mainstay cereal business apart from adding an important brand to its already popular offerings of snacks like Keebler and Cheez-It.

Pringles is famous for its packaging, as the chips are packed inside cans to preserve freshness and prevent it from breaking. Pringles are available in 140 countries and generates about two thirds of its total $1.5 billion annual sales from international business.

P&G has been shedding its non-core business to focus more on beauty and personal care products. Recently it also shed its Folgers coffee business and Jif peanut butter. Pringles was its only remaining food business, and its sellout is expected to bring an after-tax gain of $1.4 billion to $1.5 billion.

Analysts, however, have mixed opinions about the deal. While some felt that Pringles will add to the already dominant position of Kellogg in the snacks category, some are of the opinion that the brand is not very useful as it had not been faring well in its domestic market for quite some time. Moreover, they point out that the snack is not in the trend as nowadays people are more hyped about the ‘good for you’ snacks offered by PepsiCo.

Kellogg currently holds a short-term Zacks #3 Rank (Hold). On a long-term basis, we maintain an Underperform rating. P&G holds a short-term Zacks #4 Rank (Sell). On a long-term basis, we maintain a Neutral rating.

 
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