Consumer goods giant Procter & Gamble (NYSE: PG ) , advised by investment bank Morgan Stanley, was on one side. Up-and-coming snack slinger Diamond Foods (Nasdaq: DMND ) , with Bank of America's Merrill Lynch in its corner, was on the other.
Up for grabs: Pringles and $2.35 billion.
So who ended up the winner in this salty snack deal? And, maybe more importantly, with the deal structure a relatively unusual one that will give P&G shareholders the option to swap their shares for Diamond shares, is it worthwhile for P&G investors to jump ship?
Let's dig in.
Based on information that Diamond provided in a press release, combined with previous guidance issued by Diamond, I estimate Pringles is expected to show roughly $1.5 billion in revenue and $240 million in EBITDA during Diamond's 2011 fiscal year. With a total deal value of $2.35 billion, Diamond was buying (and P&G was selling) at 1.6 times revenue and 9.8 times EBITDA.
For sake of comparison, here is what comparable-company multiples look like.
Forward Revenue Multiple
Forward EBITDA Multiple
|Kraft (NYSE: KFT )
|Kellogg (NYSE: K )
|Snyder's-Lance (Nasdaq: LNCE )
|PepsiCo (NYSE: PEP )
Source: Capital IQ, a Standard & Poor's company.
Apparently, the investment bankers were looking at a very similar set of comps. It would appear that the price was pretty fair for both sides, so it's tough to give an edge here.
For P&G, the sale of Pringles jettisons the company's lone snack-food brand and works toward the company's overall goal of becoming more focused and agile. It's not going to drastically change P&G, but it is a solid strategic decision.
For Diamond, the purchase seriously bulks up the company, giving it a lot more heft to compete with snack sellers like Pepsi's massive Frito Lay division or Snyder's-Lance. The deal will also greatly increase Diamond's international presence. After the deal closes, 49% of Diamond's revenue will come from abroad. In short, the deal could be a significant step forward for Diamond.
The resulting company
Financially, P&G won't be significantly affected by the sale. There will be a one-time $0.50-per-share gain and then a slight earnings-per-share drop of $0.02 to $0.04. Operationally, the company will be incrementally more agile, but overall it'll still be the same time-tested consumer products powerhouse.
Diamond has really gone after acquisitions with gusto. The purchase of Kettle in 2010 basically doubled the company's snack business and this deal could nearly triple it. Of course, with the deals has come not only size, but debt. In the wake of the Pringles deal, Diamond will likely have around $1.4 billion in debt on its balance sheet -- a hefty slug for a company its size. And while the Pringles deal looks like a good move, big swings like this can often lead to big whiffs, so investors really need to trust that management will stay sharp in its deal making.
Where to put your money?
I'd stick with P&G. Diamond has some good brands behind it and certainly has more growth potential than the gargantuan P&G, but oversized acquisitions, particularly when they involve taking on significant amounts of debt, make me uneasy.
I also can't help but notice that investors already seem very optimistic about Diamond's future. Assuming that the Pringles deal closes by the end of 2011, Diamond's management sees earnings per share of $3.00 to $3.10 for fiscal 2012. At the midpoint, that would put Diamond's 2012 earnings multiple at 20. P&G, meanwhile, currently trades at less than 15 times its expected earnings over the next 12 months.
Of course, if you find yourself intrigued by the Pringles deal and the snack-food world in general, you don't have to rush to make a decision. Add the stocks to your Foolish watchlist and read up further before pulling the trigger.