Market Overview

If Diamond Foods Cannot Buy Pringles, Who Will?

Diamond Foods (NASDAQ: DMND) won't be buying the Pringles brand after all.

After the accounting probe into the snack maker's books concluded that it had failed to account for $80 million in payments to suppliers, it seemed certain that Procter & Gamble (NYSE: PG) would cancel its deal with the maker of Kettle Chips and Pop Secret popcorn. Today, the company confirmed that it will keep its potato chip brand for now.

In April 2011, P&G announced that it would sell its Pringles brand for $1.5 billion in a deal that had investors clamoring for Diamond stock. Pringles is one of the most popular chip brands in the world, with a global presence and iconic packaging that have made it instantly recognizable. The stock climbed to a record high in September only to fall to a 52-week low as accounting irregularities put the deal, and its earnings figures for the past two years, into doubt.

Procter & Gamble had been looking to shed its chip brand in a continued effort to reduce costs as lower sales in the U.S. challenged the company. A drop in EPS for 2011 despite higher sales signalled that a mix of higher commodities cost and a poor corporate structure were too much for the company to continue operating as it has, and some analysts maintained that the firm would need to boost profit margins to maintain a buy or overperform rating, which many analysts still hold for the company. Analysts hold a $70 median price target for the company,

Unable to sell Pringles in the short term, the firm's cost containment strategy will either need to change or they will need to find a new buyer for Pringles. Pretzel and chip maker Snyder S Lance might be interested. The company's market cap is three times Diamond's at $1.55 billion, and the company has been looking for revenue growth. Last August the company decided to buy a snack distributor in New England, but that would be peanuts compared to the potential that Pringles would provide for the company. However, the acquisition would be too big for Snyder, just as it was too big for Diamond.

If Snyder isn't interested in radical expansion, that leaves few options. Some investors have eyed Pepsi (NYSE: PEP) as a potential buyer, but with earnings down and jobs being cut, the chances of the soda maker buying the chip brand is unlikely. Coca-Cola (NYSE: KO) isn't in the snack business and there's little reason to think they will join anytime soon. General Mills (NYSE: GIS) has seen its margin hit in recent quarters, and it is already in the international snack business, but it may see Pringles as a growth opportunity.

A more likely contendor would be ConAgra Foods (NYSE: CAG), whose snack portfolio already includes David Seeds and Slim Jim beef jerky. The company has had a turnaround lately thanks to strong pricing which offset commodity costs and allowed the company to approve a buyback of $750 million in outstanding shares last December.

If ConAgra can't make the deal, a likely buyer is Kraft (NYSE: KFT), who was one of the few food suppliers to see strong growth in 2011. Kraft may see the chip brand as an attractive addition to its already staggering brand portfolio. The company has been interested in the brand for a while, and it would not be difficult for them to take on a project such as Pringles, after the company already successfully integrated British chocolate maker Cadbury's into its operations.

The only thing holding it back is that it is limited to American markets. With no global presence, it has no experience managing a global distribution of a product, and the company has not sought an aggressive growth strategy like Diamond.

Diamond, on the other hand, will probably face a deeper fall as hopes of a snack empire turn to dust. Investors may abandon it as they look to see who will take on Pringles next.

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