Diamond Foods Stock Play a Little Nutty

In February, Diamond Foods said it will likely recognize an additional $40 million in 2011 expense, pushing down earnings to a point where analysts expect that the company will breach its loan covenants. Separately, a source familiar with the matter said that Diamond Foods was in breach of certain covenants in its credit agreement prior to the forbearance.

According to those loans, a covenant breach can trigger a default, placing the company's fate in the hands of lender agreements like Wednesday's forbearance. Investors won't know the full scope of how the company's accountancy issues impact its creditor standing until the company files its earnings and re-files reports from past quarters.

The loans were raised by Diamond Foods to fund acquisitions. In 2008, Diamond Foods bought Pop Secret for $190 million and it bought Kettle Foods from Lion Capital in 2010. Last year, the company made its boldest-ever acquisition attempt in a $2.35 billion acquisition of popular potato chip brand Pringles from Procter & Gamble (PG). After its accountancy issues, that deal has been terminated, with Procter & Gamble selling the business to Kellogg's (K) for $2.7 billion.

With Pringles added, Diamond Foods had expected to earn up to $4 in earnings per share by 2015 on greater than $2.4 billion in revenue. However, in light of accountancy issues, the now looming prospect of a covenant breach and still pending earnings filings, the acquisition attempt may have been too aggressive for Diamond Foods.

When Diamond Foods cut the cash and stock deal, it simultaneously arranged a $500 million term loan and a $550 million revolving credit facility with its bankers for the purpose of funding the acquisition, and the $850 million in debt that came with it. Those loans were subject to covenants that forced the company to have financial leverage below 4.5 times earnings before interest taxes depreciation and amortization (EBITDA) into 2013 and less thereafter. After entering the deal, Diamond Foods said it expected leverage of less than 4 times EBITDA. However, in reaction to audit committee findings, Jefferies analyst Thilo Wrede said that the accounting change would cause a breach of the covenant, signaling a thin margin for error.

The big question is whether three months will give Diamond Foods the time or flexibility needed to put the company back on the right side of creditors, as shareholder lawsuits and regulatory investigations linger. Meanwhile, the company is facing management change after its former Chief Executive Michael Mendes and Chief Financial Officer Steven Neil abruptly exited the firm in February and were replaced by former Del Monte Foods CEO Rick Wolford and Alix Partners Managing Director Michael Murphy, respectively.

Since none of those questions are expected to be answered in full until mid-June, there's little reason for stock investors to take a bite on Diamond Foods. Meanwhile, there are many other interesting developments in the snack foods market for investors to pick over.

On Wednesday, Kraft Foods (KFT) said that when it spins its snack foods division later in 2012, the Oreo's cookies and Cadbury Crème Eggs-selling unit will be called Mondelez International. Meanwhile, Kellogg's shares surged in February when Procter & Gamble sold Pringles to the cereals and snacks giant, in a deal that it expects will add up to 10 cents in 2012 earnings per share.

In recent months, Ralcorp (RAH) completed a spin of its Post cereals business, an acquisition of Sara Lee's (SLE) refrigerated doughs business and spurned a $94 a share takeover from ConAgra Foods (CAG).

For more on snacks investments, see 7 stocks to benefit from lower corn prices and top yielding food and beverage stocks.

--Written by Antoine Gara in New York

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