Kellogg buys Pringles for $2.7B

MANILA, Philippines - Kellogg Co. agreed to buy Pringles potato chips for $2.7 billion in a cash deal that makes the cereal company second only to PepsiCo Inc. in the global snack food market.

The transaction also marks the final exit of household products maker Procter & Gamble Co. from the food business after its earlier deal to sell Pringles to Diamond Foods Inc fell apart.

The deal was gobbled up on Wall Street. Shares of Kellogg, whose snack brands already include Keebler cookies, Cheez-It crackers and Kashi snack bars, rose as much as six percent to their highest since early November, when the company posted disappointing results and cut its 2011 earnings outlook.

Adding Pringles will nearly triple the size of Kellogg’s international snack business, pushing snacks to a point where they will account for as much of total revenue as Kellogg’s well-known cereal business – the world’s largest, with brands such as Special K and Rice Krispies.

Edward Jones analyst Jack Russo said the diversification is good since the cereal business is highly competitive between Kellogg, General Mills Inc. and private label brands.

“It’s a win-win,” Russo said. “It gets Procter more focused on where they need to be and it’s additive to Kellogg’s earnings.”

Pringles, whose products are sold in over 100 countries, has suffered from being on the block for nearly a year, Russo said. Still, it is a good brand with a strong international distribution network that will likely boost the sales of Kellogg’s existing products, he added.

P&G had agreed to sell Pringles to Diamond Foods last April, for $1.5 billion in cash. With $850 million of debt, the enterprise value was $2.35 billion on that deal, which was structured in a way that let P&G save on a hefty capital gains tax.

But that deal became “no longer feasible,” according to P&G chief executive Bob McDonald, following the discovery of improper accounting at Diamond that led the snacks company to replace its chief executive and finance chief. The US government is looking into Diamond’s accounting practices.

The new deal, worth $2.7 billion, is structured differently. On a conference call, Credit Suisse analyst Robert Moskow estimated that there could be $490 million of tax benefits for Kellogg, which means it is paying closer to $2.2 billion.

Even though the new deal is “modestly less attractive” than the Diamond deal, Oppenheimer analyst Joseph Altobello said it improves P&G’s profile since it removes a non-core brand.

Diamond said on Wednesday that it does not have to pay any break-up fee on the aborted Pringles deal and its shares rose more than 5 percent.

With Diamond’s future unknown, some analysts have begun to assess the attractiveness of its snack food brands, Kettle potato chips and Pop Secret popcorn, to another buyer.