Diamond Foods may breach debt covenants: analysts

Diamond Foods may breach debt covenants: analysts

Stock Market Predictions

(Global Markets) - Diamond Foods Inc (DMND.O) is likely to breach its debt covenants and cancel its biggest-ever deal, analysts said, as its stock tumbled 37 percent a day after the company removed its two top executives and said it would restate results for the last two years.

"Diamond's (earnings) restatements will cause debt covenant default and ultimately raise interest expense," Janney Capital Markets analyst Mitchell Pinheiro said in a note, adding that Diamond's proposed purchase of Pringles potato chips from Procter & Gamble Co (PG.N) was "finished."

The company will most likely have to renegotiate the terms of its debt and pay a higher interest rate, KeyBanc Capital Markets analyst Akshay Jagdale said.

The restatement of results would change the ratio of debt to earnings -- one of the terms of Diamond's debt agreements.

Diamond -- which had debt of $531.7 million and just $3.1 million of cash as of July 31, 2011 -- did not have an immediate comment.

On Wednesday, Diamond, maker of Pop Secret popcorn and Kettle chips, said its audit committee found the company had improperly accounted for payments to walnut growers. It said it would restate results for fiscal years 2010 and 2011.

Diamond removed Chief Executive Michael Mendes and named a director, Rick Wolford, as acting CEO. It also replaced Chief Finance Officer Steven Neil with Michael Murphy of consulting firm Alix Partners.

SunTrust Robinson Humphrey's William Chappell, who previously backed the company's accounting practices, cut his rating on the stock to "neutral" from "buy," admitting that he had been wrong.

"This is the worst-case scenario, not only creating uncertainty around the financial statements and removing a senior management team that directed the solid growth of the past few years, but also likely rendering dead the pending Pringles deal," Chappell said in a note.

The company's stock was down 37 percent at $23.31 Thursday afternoon. Earlier in the session the shares fell to $21.44, their lowest in almost three years. More than 26 million shares were traded -- nearly 13 times the stock's 10-day moving average.

Using figures from Data Explorers, about 80 percent of Diamond shares that are available to be borrowed are already on loan, indicating a high number of short sellers.

LOW ENOUGH?

Some observers said Diamond's stock is a good buy at its current range of $22 to $24, because the company still has strong brands.

"They still have good businesses -- Pop Secret, Kettle and (Emerald) nuts," a Diamond investor who declined to be named told Global Markets. "When cooler heads prevail, the stock should trade back up somewhere in the 30s, probably after a couple of quarters."

KeyBanc's Jagdale said Diamond's various businesses were together worth about $44 a share. Janney's Pinheiro said number is $31 a share.

Pinheiro said Diamond should earn about $1.70 a share in fiscal 2012. The company previously forecast adjusted earnings of $3.05 to $3.15 a share.

However, RBC Capital Markets analyst Edward Aaron suspended his earnings estimates and said it was difficult to stick a value on Diamond, with the company going through so many changes and multiple lawsuits and investigations still in progress.

PRINGLES DEAL

After the company said it would restate results, P&G started going through the merger documents to make sure it can cancel the sale of Pringles without triggering a breakup fee, a source familiar with the matter said.

P&G has been approached about a possible Pringles deal, but it has not held substantial talks, the source said.

"P&G wants to structure the deal as a reverse Morris Trust so it can minimize taxes for shareholders, and it also has to find a good fit for the brand. It is going to be a challenge for them to find a buyer (for Pringles) given these conditions," Morningstar analyst Lauren Desanto told Global Markets.

A reverse Morris Trust deal saves on capital gains taxes that a parent company otherwise would have to pay in a straight sale of a unit or asset.

P&G declined to comment.

(Reporting by Mihir Dalal in Bangalore; additional reporting by Jessica Hall in Philadelphia, Jessica Wohl in Chicago and David Gaffen in New York; Editing by Don Sebastian, Viraj Nair, John Wallace and Steve Orlofsky)