Cereal maker Kellogg Co. (NYSE:K) said it agreed to buy Procter & Gamble's (NYSE:PG ) Pringles brand for $2.7 billion to expand its snacks business.
The deal came after P&G agreed to terminate its earlier sale deal with Diamond Foods (NASDAQ:DMND) whose internal probe over accounting scandal has been delaying the deal.
Excluding transaction costs, Kellogg expects that the transaction would add 8 to 10 cents a share to its 2012 earnings and achieve $50 million to $75 million in synergies from 2014.
In addition, Kellogg is also gaining scale internationally, particularly with its growing snacks business, which could lead to higher revenue growth over time. Pringles would add over $1 billion in annual sales to Kellogg, whose products include Keebler, Cheez-It, Apple Jacks and Froot Loops.
Snack foods are gaining popularity as people have started consuming five or six small meals a day, rather than the conventional three large meals. One out of every five meals consumed in the U.S. is a snack meal, according to NPD.
However, a Wall Street analyst is skeptical over Kellogg's move of purchasing Pringles as he feels that Pringles brand is out of sync with Kellogg's recent acquisitions and expressed over Kellogg's strategic direction.
"We find ourselves less enthralled with the strategy behind purchasing a domestically tired brand that appears somewhat out of sync with the trends toward better for you snacking, as well as K's more recent acquisitions of small, healthy food brands," Jefferies analyst Scott Mushkin wrote in a note to clients.
The analyst said a survey of the packaged foods business showed that in N. America changing demographics and changing tastes is driving growth to a certain degree away from traditional brands. "This raises the question of whether the capital invested in Pringles, which in our opinion appears to be a tired brand in the core US market and not in sync with the better for you trends, is wise over the long-term," said Mushkin, who has a "hold" rating on Kellogg shares.