Glenboden M & A Originations

Will Diamond be forced to sell Kettle potato chips ?

Priority Rating priority rating 4
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Origination Status market rumours of impending divestment, March 2014
Asset Kettle Foods (USA), leading premium potato chip brand in US and UK
Buyer candidates include Investcorp, Kellogg, Raisio, Intersnack
Seller Diamond Foods Inc. (USA), no.2 domestic packaged nuts producer
Buyer Rationale premium snacks segment growth, internationalisation potential of brand
Seller Rationale raise cash to repay excess debt
NBs Diamond acquired Kettle in 2010 as part of its diversification strategy beyond nuts
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On the back of significant losses from 2012 to H1 2014, Diamond Foods is apparently under pressure to sell a jewel in its crown, Kettle chips, in order to repay its excess debt, which has recently been refinanced. Should the group be forced into such a move, disastrous strategically, then at least the brand would attract significant buyer interest at this time.

The rise and fall of Diamond ...Historically a walnut growers’ marketing co-operative in California, Diamond acquired Emerald Snacks in 2004; went public in 2005; acquired Pop Secret popcorn in 2008; then bought Kettle in 2010.

As a result, the group has delivered an impressive growth story (see profile); emerging from obscurity to be the no.2 brand in US nuts market after Kraft’s ‘Planters’, it also has a significant premium savoury snacks business.

However decline has now kicked in. In 2013, Diamond's sales by 12%, and a net loss was booked of US$ 176 mln, stemming mostly from the settlement of a securities class action lawsuit and an asset impairment charge to the acquired 'Kettle' trademark. Losses continued in H1 2014.

... Oaktree's stay of execution ...Diamond's downturn had already begun in 2012, in which year it sought refuge in an 'alternative' investment provider, Oaktree Capital, who provided unsecured debt of US$ 225 mln, with a warrant to purchase common stock under defined terms and circumstances.

Oaktree's loan made the divestment of Kettle more probable, in our view, because that fund manager specialises in such situations. Take Belvedere spirits, in which Oaktree is a major shareholder after a debt conversion; that group is selling significant assets now.

No doubt mindful of its pending fate with Oaktree, at the start of H2 2014 Diamond refinanced its indebtedness, including the early redemption of its Oaktree unsecured loan. The question remains however, whether that move has allowed the group to escaped strategic disaster after all.

... Kettle divestment averted ?It would be strategically very damaging for Diamond to sell Kettle, since it's increasingly important for savoury snacks producers to offer a full-range to the retail trade; without Kettle chips the group would have a big hole in its portfolio.

The divestment would also hit results hard, as Diamond's growing snacks sales (chips and popcorn) now constitute half of total revenues and two-thirds of gross profit, while its nuts business is in decline.

So, the question is whether Diamond's new debt structure, arranged in the context of continued losses, allows Diamond to avert the divestment of Kettle or other significant assets, or at best just delays that eventuality.

Good time to sellAt least the timing for the divestment of a premium potato chips brand is good, in the light of the strong buyer interest in the similarly -positioned 'Tyrrells' chips brand in the UK, sold in late 2013 to Bahrain -based Investcorp for x13,5 EBITDA.

Glenboden's valuation estimate for Kettle (see valuation) represents a symbolic premium to the Tyrrells deal, as we assume the former to be significantly larger in sales revenue terms than the latter; that factor should increase private equity interest in Kettle.

Investcorp now has a platform in premium chips with Tyrrells, but only 20% of that brand's sales are outside the UK. The purchase of Kettle would provide greater scale for Investcorp, and expansion into the big US snacks market.

From the strategic investor side potential acquirors include Kellogg, who famously entered the savoury snacks market through buying 'Pringles' in 2010, a business that's performing well and that the group is successfully integrating.

From Europe one might tip Raisio, who gained a significant snacks business in the UK through acquiring 'Glisten' in 2010; moreover Intersnack, the European savoury snacks consolidator as yet without a significant US presence.

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THIS LEAD'S VALUATION
Size (€ mln) n.a.
Sector savoury snacks
Asset Quality US and UK premium
Seller mid-cap plc
Buyer private equity
P/S n.a.
P/Ebitda 14,0
Type total consideration estimate
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