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With Pringles, Kellogg looks to expand overseas by serving craving for snacks

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POSTED February 15, 2012 8:12 p.m.



 

NEW YORK (AP) — Kellogg is hoping Pringles will satisfy its craving for a salty snack.

The food giant is best known for its lineup of sweet breakfast items, including Frosted Flakes and Eggo frozen waffles. But on Wednesday, it became the world's second-biggest savory snack maker behind PepsiCo Inc.'s Frito-Lay with a $2.7 billion deal to buy the potato snack brand from Procter & Gamble.

The addition of Pringles bolsters Kellogg Co.'s cupboard of salty snacks such as Cheez-It and Keebler's Club crackers. It also positions the company to expand at a time when the appetite for on-the-go foods is growing worldwide, particularly in emerging markets like China and India.

"When you have people moving to the cities and becoming urbanized, they're less likely to eat foods they grow themselves," said Tom Graves, an analyst for Standard & Poor's who follows Kellogg. "There's a bigger opportunity to sell packaged foods."

Kellogg, which gets most of its revenue from North America, is looking for Pringles to help it expand into a global snacking company. Pringles, known for its iconic tube packaging, is sold in more than 140 countries and gets two-thirds of its $1.5 billion in annual revenue from overseas.

It's difficult to quantify growth in the global snacking market. But it's clear snacking is gaining popularity in the United States as more people adopt the school of thought that it's better to eat five or six small meals a day, rather than the conventional wisdom of eating three large ones.

"That's creating a lot of hungry people," said Phil Lempert, editor of Supermarket Guru, which tracks the packaged food industry.

Between 2008 and 2018, the number of "snacking occasions" throughout the day in the U.S. is set to increase by 19 percent, according to market researcher The NPD Group. And in the past year, sales of snack foods rose 3.3 percent to $16.6 billion, according to Nielsen. That's on top of a 1.8 percent growth the previous year.

Pringles, which coined the popular slogan in the U.S. "Once you pop, you can't stop," has also benefited from the snack rush. Shipments of the brand increased 5 percent in the latest quarter, according to Procter & Gamble.

The snack, which was first tested in 1968, was packaged in cans to preserve freshness and prevent them from breaking like other chips do. The chips are made from dough that contains just 42 percent dried potatoes. And despite a common misconception, they're fried, not baked.

P&G wanted to sell Pringles, the last of its food businesses, to focus on its core household and consumer goods products. Kellogg was able to swoop in to buy Pringles from P&G. after Diamond Foods Inc.'s proposed $1.5 billion acquisition of the brand fell through.

Speculation had been growing that Diamond's offer was in trouble after the San Francisco company announced a week ago that it was replacing its CEO and CFO after an internal investigation found that the company improperly accounted for payments to walnut growers. Diamond, which makes Emerald Nuts and Pop Secret popcorn, now needs to restate two years of financial results.

Last week, Cincinnati-based P&G said it was evaluating the deal and keeping all options open. The company even said that Pringles had "attracted considerable interest from other outside parties."

Kellogg expects to complete the Pringles acquisition during the summer, possibly on June 30. If the deal closes around that time, Kellogg anticipates it will add about 8 to 10 cents per share to its 2012 earnings before accounting for the acquisition and one-time costs and changes to its buyback program. One-time costs are expected to be between $160 million and $180 million, with approximately $70 million to $90 million of those costs likely to be recognized in 2012.

Kellogg said its debt is likely to increase by about $2 billion and that it will limit stock buybacks for about two years to allow the company to reduce its debt.

P&G expects an after-tax gain of $1.4 billion to $1.5 billion, or about 47 cents to 50 cents per share, from the deal with Kellogg. P&G said it now expects fiscal 2012 earnings of $3.30 to $3.43 per share, which excludes the gain from the Pringles sale. If the sale closes in the current fiscal year, the company foresees earnings between $3.77 and $3.93 per share. This includes the one-time gain of 47 cents to 50 cents per share.

Diamond noted the termination of its deal with Procter & Gamble was mutually agreed upon, and that it will not pay any breakup fees as a result. Industry experts had believed that Diamond would possibly have to pay a $60 million breakup fee to P&G and potentially up to $6 million in related costs.

 

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