Diamond shares jump on settlement, outlook

Diamond shares jump on settlement, outlook

Diamond Foods shares surged almost 20% yesterday (21 August) after the company said it has reached an agreement to settle a shareholder lawsuit and raised its financial guidance.

The US savoury snack maker said it has struck a deal in a class action lawsuit that would see it pay a settlement fund US$11m in cash and issue 4.45m shares to resolve all claims related to last year's revelations that the group incorrectly accounted for payments to walnut growers.

The accounting scandal scuppered Diamond's plans to acquire Pringles from Procter and Gamble and forced the company to restate financial results for 2010 and 2011, wiping out $56.5m in profit. The episode also led to the departure of Diamond's CEO and CFO, Michael Mendes and Steven Neil.

The agreement, which is pending court approval, is worth a total of around $96m and represents 25-40% of the amount the lead plaintiff argued was maximum damages recoverable in the case.

The company insisted it "denies all claims of wrongdoing or liability".

Commenting on the settlement, CEO Brian Driscoll said it would allow the management to "move forward fully focused on expanding the reach of our leading brands and executing on our strategic and operational initiatives for growth".

Driscoll added the group's fourth-quarter performance allowed the group to round out the year "in an improved financial position". The company said fourth-quarter sales would fall in a range of $196-$201m, above previous forecasts of $187m. For the full year, Diamond said it expects net sales of $860-$865m and EBITDA of $98-$101m.

Shares in the company jumped on the announcement, as investors reacted positively to the likely settlement of this final legacy issue and new clarity over the timing and scale of the settlement.

"This clears one substantial overhang on the shares, making for added visibility in valuing the going concern," BB&T Capital Markets analyst Brett Hundley said. 

However, Hundley emphasised the company is still grappling with a number of thorney issues, namely the high cost of its current financing arrangements with Oaktree Capital and the need to reinforce its supplier base. 

"We believe that the grower rebuild is going slow; this will take time, as growers have signed longer-term contracts with other processors, and/or remain disenchanted by previous company actions. A more structural overhang, in our opinion, is the potential refinance of its 12% Oaktree debt."

Shares gained 19.3% to US$22.79 in New York yesterday.