Kellogg rescues P&G from over-cleverness
By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
“Half the cleverness, none of the risk” makes an apt cereal-box slogan for Procter & Gamble’s sale of Pringles to Corn Flakes-to-Froot Loops giant Kellogg. By offloading the chips business for $2.7 billion in cash, P&G swaps a complex structure that, while it would have saved on payments to the tax man, put the consumer giant’s corporate finance competencies to a severe test.
And what may be P&G’s loss looks like Kellogg’s gain. While the cereals group is plunking down 15 percent more in cash than Diamond Foods had originally agreed to pay in new stock, the accompanying cost savings more than justify the premium. In a nutshell, this is a reasonable outcome, not least because P&G emerges with a valuable lesson the rest of Corporate America would be wise to observe.
The Kellogg deal makes it easy to see why P&G was tempted by a more complex transaction with Diamond last year. After paying taxes of as much as 48 percent of the value of the deal, P&G will bring in as little as $1.4 billion from the Pringles sale. Accepting a lower offer of $2.35 billion from Diamond would have avoided handing over a big slice of shareholders’ booty in the form of capital gains. Rather than the earnings per share gain of as much as 65 cents it predicted from the Diamond deal, P&G predicts it will reap a 50 cents-a-share gain from the Kellogg arrangement.
As in life, however, there’s no free lunch in the snack foods business either. The so-called “reverse Morris trust” structure required P&G shareholders to elect to receive Diamond stock. And as catalogued and brought to light by Breakingviews, Diamond’s finances turned out to be pretty nutty. The salty snacks purveyor last week came clean on about $80 million of bad accounting and replaced its chief executive and chief financial officer.
Despite having used this structure before, P&G clearly failed to adequately crunch the details on its Pringles partner. The scale of Diamond’s revelations suggests P&G, its accountants and advisers at Morgan Stanley and Blackstone missed, or simply chose to ignore, some warning signs. That should be a lesson to all companies contemplating serving up another firm’s equity to their own shareholders.