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September 21, 2010

US: Talk of Pringles-Diamond “merger” garners mixed reaction

Procter & Gamble's reported rejection of a proposal to merge its snacks business Pringles with US snack maker Diamond Foods has attracted a mixed response from industry watchers.

Procter & Gamble’s reported rejection of a proposal to merge its snacks business Pringles with US snack maker Diamond Foods has attracted a mixed response from industry watchers.

According to a report from Bloomberg on Friday evening (17 September), P&G was in talks with Diamond but stopped negotiations amid concern about how the potential deal was structured.

A potential deal could have seen P&G take a majority stake in the combined Pringles and Diamond business. However, P&G was said to be concerned that a majority stake with a just small number of shares in the combined business outstanding would make it harder for investors to sell the remaining shares.

Barclays Capital analyst Andrew Lazar argued that P&G has “long considered Pringles a divestiture candidate, so we wonder if the news comes at a time when all potential ‘talks’ have stalled”.

Lazar acknowledged that he understood that “many aspects” of the Pringles business would be attractive to Diamond.

“The US$1.4bn brand would substantially increase Diamond’s scale in snacks and bring another highly profitable brand into its portfolio. Plus, Pringles’ international exposure opens the door to growth opportunities abroad (a risk too),” Lazar said.

However, Lazar cautioned an acquisition of Pringles would put Diamond into more direct competition with Frito Lay.

“We can’t help but wonder how much Pringles currently benefits from P&G’s vast distribution scale, which would be difficult to replicate elsewhere,” he added.

Elsewhere, Heather Jones, an analyst with BB&T Capital Markets reiterated Lazar’s sentiments and set out potential benefits and drawbacks for Diamond.

“The Pringles chip brand would broaden Diamond’s snack portfolio and potentially increase its leverage with the retailer,” Jones told just-food. “It could also potentially bolster Diamond’s international snack business and domestic c-store business.”

However, she added that the Pringles brand has “struggled for years” and could potentially require “a lot of marketing/R&D investment to revitalise and could ultimately be a distraction for Diamond management”.

It is unclear yet as to whether talks will resume. Diamond yesterday declined to comment on the reports, while officials at P&G could not be reached for comment.

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