This week’s joint announcement of a definitive agreement to merge Procter& Gamble’s current Pringles© business into Diamond Foods has lots of significant supply chain implications and could provide the prime supply chain integration story for 2011.

The transaction, valued at $2.35 billion is subject to approval by Diamond shareholders, and is expected to close by the end of calendar year 2011.  Under the terms of a “Reverse Morris Trust” transaction, P&G will establish a separate entity to hold the Pringles© business, while Diamond’s existing shareholders will maintain ownership of approximately 43 percent of the combined company. This is a similar arrangement that P&G used to structure previous divestitures of Folgers© to J.M. Smucker. The joint press release outlines other terms of the agreement including the assumption of Pringles ©outstanding debt by Diamond.

The deal, when completed, has the potential to immediately create Diamond Foods as the new number two snack foods provider, behind Frito-Lay. Diamond’s other brands include Emerald© nuts, Pop Secret ©microwave popcorn, and the recent acquisition of Kettle Brand© potato chips.   Diamond doubled its snack food business with the acquisition of Kettle Foods, and with Pringles stands to triple its business.

The announcement itself has been long rumored since P&G has been divesting of most all of its food-related businesses for the past several years in favor of existing higher margin business such as beauty and personal care products. The Memphis Business Journal makes note of a Bloomberg News story last September when P&G pulled out of talks with Diamond after the two sides could not come to terms.

Like all of P&G businesses, Pringles© has become a globally recognized brand with a billion plus revenue stream that comes with highly efficient manufacturing and supply chain operations.  Pringles© two main production plants are in Jackson Tennessee and Mechelen Belgium, with other satellite manufacturing occurring in China and Malaysia. Pringles© also provides a proprietary and innovative manufacturing and packaging process with an ambient store warehouse delivered distribution system. The Pringles ©flexible manufacturing process allows for specific flavors to be featured for a specific global region, such as Pringles© seaweed flavored in Asia or Pringles lime flavored in Latin America.

When completed this deal propels Diamond into a notable global food snacks presence, able to leverage new growth opportunities in emerging consumer markets as well as compete with other global snack food providers such as Frito-Lay and Kraft Foods.  Both Frito-Lay and Kraft have supply chain cost challenges of their own. Kraft with its acquisition of Cadbury, and Pepsico, parent of Frito-Lay with its acquisition of North America and a foreign bottling distribution.  This merger announcement will only add more of a looking glass to those challenges.

In channel s mix, the opportunities and synergies are very strong among the two entities. Diamond’s dominant presence is in grocery (75 percent) while Pringles dominant presence lies among mass merchandizing (48 percent), grocery (25 percent) and convenience (12 percent).

The deal comes with a one year transition services agreement where P&G will continue to assist in marketing, production and distribution of the Pringles brand while Diamond completes the transition.  P&G has a well-respected reputation for excellence in marketing and supply chain capabilities which will surely help during the transitionary period.  Pringles has also benefitted from P&G ‘s investments in supply chain information technology and analytical capabilities.

Diamond is targeting $25 million in cost savings primarily from leveraging existing shared services and consolidating procurement requirements. The Pringles business will have to be integrated into Diamond’s existing ERP and supply chain systems footprint. However, as mentioned, the real opportunity lies in leveraging a combined distribution model that can service multiple channels and supply chain cost targets.

Having just completed the recent acquisition of Kettle Foods, Diamond senior management feels confident that there has been quite a lot of learning regarding integration, and further recognizes the tremendous upside potential and noted supply chain capabilities that come with Pringles.  Having the Pringles team lead in this integration would be, in our view, a tremendous plus factor.

On paper, the global reach and supply chain distribution potentials for snack foods appear rather compelling.  Bu just like the just completed NCAA Final Four basketball tournament, what looked good on paper can sometimes produce different results.

We will await the final results.

Bob Ferrari