February 9, 2012 / 2:00 PM / 6 years ago

Diamond Foods may breach debt covenants: analysts

(Reuters) - Diamond Foods Inc DMND.O is likely to breach its debt covenants and cancel its biggest-ever deal, analysts said, as the stock crashed 37 percent following an accounting scandal and the ouster of the company’s top management.

“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 buy of Pringles potato chips from Procter & Gamble Co (PG.N) was “finished.”

Diamond did not have any immediate comment on whether the restatements would result in a breach of its debt covenants.

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 the fiscal years 2010 and 2011.

Diamond removed Chief Executive Michael Mendes and named director Rick Wolford as acting CEO. It also replaced finance head 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.

    Janney Capital’s Pinheiro expects Diamond to earn about $1.70 a share in fiscal 2012. The company previously forecast adjusted earnings of $3.05 to $3.15 a share.

    Some observers believe Diamond’s stock is a good buy at its current levels of $22-$24, saying 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 Reuters. “When cooler heads prevail, the stock should trade back up somewhere in the $30s, probably after a couple of quarters.”

    KeyBanc Capital Markets’ Akshay Jagdale said Diamond’s various businesses were together worth about $44 a share. Janney’s Pinheiro believes that number is $31 a share.

    The company’s stock was down 37 percent to $23.08 near midday Thursday after falling as low as $21.44 earlier in the session.

    Reporting by Mihir Dalal in Bangalore; Editing by Don Sebastian, Viraj Nair and John Wallace

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