Kellogg Acquisition of Pringles Is Credit Negative on Execution Risk

Kellogg Acquisition of Pringles Is Credit Negative on Execution Risk

Kellogg Co. (Baa1 negative) on Wednesday said it will buy the Pringles snack brand from Procter & Gamble Co. (Aa3 stable) for $2.7 billion in cash, a credit-negative deal that raises concern about leverage and execution risk at a time when Kellogg is already facing challenges in its cereal business.
Weighing on the credit profile is uncertainty surrounding important details of the proposed acquisition, including the amount and timing of expected tax savings and upfront costs as well as expected cost and revenue benefits. In addition, because Pringles has been distracted by an extended sales process, Kellogg is more likely to encounter unexpected operating challenges during the integration. On the announcement of the deal, we downgraded Kellogg to Baa1 from A3 and revised the rating outlook to negative from stable.

Kellogg plans to finance the transaction and related expenses by issuing $2 billion in new debt and using international cash balances; anticipated terms of the new debt are not yet known. We estimate that Kellogg’s adjusted debt-to-EBITDA ratio will be between 3.5x and 4.0x once the deal closes, which is expected by June, compared with about 3x currently.

This acquisition comes as Kellogg is already struggling to turn around its branded cereal operations, raising concern about the company’s ability to also manage a possibly challenging integration of Pringles. Over the past two years, following a period of heavy industry price promotions and weak product innovation, the cereal category has weakened and so has Kellogg’s pricing power. The snack segment that Pringles will be part of continues to contribute solid earnings, but this segment faces the effects of a weak global economy and heavy competition in the UK from the likes of Kraft (Baa2 developing) and Nestle (Aa1 stable).

P&G agreed to sell the Pringles business to Diamond Foods (unrated) in April 2011, but accounting problems at Diamond derailed the deal last week, opening the door to the deal with Kellogg.