Has Diamond Foods Lost Its Luster?

Diamond Foods’ Chief Executive Officer Michael J. Mendes has used a combination of product innovation, savvy marketing, and acquisitions to transform a sleepy cooperative for walnut growers into a $1 billion-a-year purveyor of such snacks as Kettle chips and Pop Secret popcorn. Diamond’s pending $2.35 billion deal for Procter & Gamble’s Pringles brand was to be Mendes’s crowning achievement, a move that would double annual sales to $2.4 billion and extend Diamond’s reach into Asian and Latin American markets.

Except only weeks before the deal was set to close, Diamond’s board announced in November that its audit committee was investigating whether money paid to walnut growers in September violated accounting rules. The company’s treatment of the payment may have helped buoy Diamond’s share price—making the Pringles purchase easier to accomplish. The accounting, now also the subject of a probe by the U.S. Securities and Exchange Commission and class action litigation, may scuttle the Pringles deal if it leads to an earnings restatement of two or more years, according to Jefferies analyst Thilo Wrede. More than half of Diamond’s market value has been wiped out since questions about the payments emerged, casting a harsh spotlight on Mendes, who declined through a spokesman to comment on the company’s accounting issues. “This company was on the verge of becoming a real global consumer-product company with Pringles,” says RBC Capital Markets analyst Edward Aaron. “I always said if they could make it work, it could be a highflier. And it worked—until it didn’t.”