Kellogg is reportedly in late-stage talks over a potential acquisition of US snack maker Diamond Foods in a deal that could be valued at around US$1.5bn.
According to The New York Post, citing unnamed sources, it is expected Diamond will receive $35-40 per share. Rumours Diamond is shopping itself emerged last month and there was some talk earlier this month the Kettle Chips maker could look to sell itself piecemeal. The Post suggested Kellogg has been the most aggressive suitor for the business.
Kellogg is struggling in North America where, although investment behind its cereal brands is slowing negative sales trends, the result is weakening operating profit and lower return on investment. In particular, the company's cereal business has been hit by the double whammy of a declining category due to shifting breakfast consumption patterns at a time of increased competition from smaller brands appealing to the evolving demands from shoppers..
Kellogg's snacks portfolio, which includes the Pringles brand, is faring somewhat better. While US snacks are facing increased competitive activity – such as the rising popularity of brands like Kind snack bars – the category itself is fundamentally sound.
In a recent note to investors, Sanford Bernstein analyst Alexia Howard said: "Kellogg might want to scour domestic and international markets to build scale in snacks and leverage the US DSD system more effectively. Diamond Foods or a broader roll up of publicly-traded US snack companies (eg J&J Snack Foods, Snyder's-Lance if insider ownership issues can be overcome) might be a start."
According to Howard, Diamond would be within Kellogg's reach. Even assuming a "lofty premium" and a deal value in the region of US$1.9bn the transaction could see Kellogg's shareholders come out on top. "The transaction could be neutral to Kellogg's EPS before synergies and ~4% ($0.16) accretive with cost synergies of 8.5% of Diamond Foods' revenues. And it might just help to get the top-line going again," Howard suggested.