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The Science of Hitting
The Science of Hitting
Articles (418) 

Diamond Foods CEO & CFO Removed; Stock Freefalls

February 08, 2012 | About:

In April of last year, Procter & Gamble (PG) announced that they were selling Pringles, the chips brand, for $1.5 billion to Diamond Foods (DMND) in exchange for $1.5 billion in stock via a “Reverse Morris Trust” transaction. At the time, the deal was big news for DMND: As a result, the company would more than double its sales in key regions like the U.S. and the UK, and would become the second-largest snack foods company in the world behind PepsiCo (PEP). After the announcement, the stock climbed 12% to more than $60 per share; in the coming months, it would continue to climb, and peaked above $90 per share in September.

Fast forward to today, and the story has taken a dramatic turn for the worse. On November 1, the company announced that the acquisition would be delayed due to an investigation into potential concerns regarding accounting of crop payments to walnut growers; at that point, the stock fell from $64 to $52, a collapse of nearly 20%.

Today, the results became apparent: The company had wrongly accounted for the payments to walnut growers, and will need to restate their financial statements for the past two fiscal years. In addition, Michael J. Mendes, chairman, president and CEO, and Steven M. Neil, CFO, were both put on administrative leave; negotiations about their severance and board seats are ongoing (clearly they should be dismissed without a penny in severance).

According to the Wall Street Journal article (which notes the opinion of someone familiar with the matters), Procter & Gamble is “highly unlikely” to complete the sale as a result of these new revelations, and will likely search for a new buyer.

As a result of this news, shares plunged even further; at the time of writing, the stock was trading in the after-hours market around $20.75 per share, a drop of more than 40% from Thursday’s close. Since peaking around $90 per share in September, shares have fallen more than 75%.

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About the author:

The Science of Hitting
I'm a value investor with a long term focus.

As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "Patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.

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