Tuesday, April 5, 2011

Diamond Foods and P&G's Pringles Brand to Merge

The Pringle's brand, owned by Procter & Gamble (PG), is being merged with Diamond Foods (DMND).

Ownership, if the deal is completed, of the newly combined company would be as follows:

Procter & Gamble shareholders will own ~57%.

Diamond Foods shareholders will own ~43%.

The deal would result in a company with a fair amount of debt for its size. In fact, the new company would be taking on $ 850 million of Pringle's debt in addition to the ~ $ 550 million in debt that Diamond Foods had before the deal.

From the Diamond Foods press release:

"Pringles is an iconic, billion dollar snack brand with significant global manufacturing and supply chain infrastructure," said Michael J. Mendes, Chairman, President and CEO of Diamond Foods. "Our plan is to build upon the brand equity Pringles has established in over 140 countries.

Some financial estimates for the deal from later in the release...

Assuming Pringles had been owned for all of fiscal year 2011, the combined company would be expected to deliver the following estimated financial results on a pro forma basis for fiscal year 2011:

-Net sales of approximately $2.4 billion;
-Double-digit accretion to earnings per share (EPS), excluding merger and integration costs;
-Estimated earnings before interest, taxes, depreciation and amortization (EBITDA), including $25 million in synergies, of approximately $398 million to $410 million.

In addition, cash flows after investments in brands and capex is expected to increase. More from the release:

The transaction is expected to significantly increase cash flow and accelerate the de-levering of Diamond's balance sheet. Pro forma leverage at closing is projected to be below four times EBITDA, and projected to drop below three times at the end of fiscal 2013. Cash flow after brand investments and capital expenditures is expected to approach $200 million in the first full fiscal year after closing the merger.

The deal will triple Diamond's snack business and give the company a bigger overseas presence.

Prior to today's transaction:

Diamond Foods had ~$ 550 million of debt, was expected to generate $ 930 million in annual revenue, and free cash flow in the $ 70-80 million range as a stand alone business. The free cash flow estimate is based upon doubling the free cash flow (net income + depreciation - capex) produced during the first two quarters of FY 2011. I think that's a reasonable but clearly rough approximation of likely future free cash flows.
(There's not much of a meaningful free cash flow track record that includes the recent businesses acquired. Free cash flow on a trailing basis looks worse but possibly understates.)

So, taken at face value, shareholders of Diamond Foods have financially gone from owning 100% of the above to 43% of a new company with the following:

Debt: $ 1.4 billion
Revenue: $ 2.4 billion
Free Cash Flow: approaching $ 200 million

I will say it's a bit odd to call this deal a way to "accelerate the de-levering" when $ 850 million of incremental debt is being added to the balance sheet. The extra scale certainly has a chance to make it easier to service that debt (while having a large well-financed majority owner in P&G certainly doesn't hurt).

With DMND trading at ~$ 63/share today, market value of the new company is ~$ 3.2 billion*. Overall, maybe the deal will prove to make sense for Diamond Foods shareholders if the $ 200 million in free cash flow is actually there. The deal is too small to matter much to P&G shareholders.

Diamond Foods didn't seem exactly cheap before this deal was announced. At current prices, the new company seems neither a bargain nor expensive at 16+ times those yet to be proven future free cash flows.

Adam

Long PG

* Based upon the 29.1 million new shares being issued as part of this transaction added to the 22.2 million shares already outstanding.
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