Michael Mendes' dream for Diamond Foods shattered
Andrew S. Ross, Chronicle Columnist
Sunday, February 12, 2012
Michael Mendes is looking at more than just a dream dying.
The 48-year-old son of Azorean immigrants had taken what was a Northern California walnut cooperative and turned it into a company poised to become one of the biggest snack food makers in the world.
Last week, it all came crashing down.
Mendes, CEO of San Francisco's Diamond Foods, was summarily ousted, along with the company's chief financial officer, in the wake of an internal audit that revealed improper accounting of payments to walnut growers, resulting in the public company having to restate two years of earnings.
Poof! Gone, almost certainly, is the planned acquisition of Pringles from Procter & Gamble, which would have made Diamond Foods second only to PepsiCo as a purveyor of snack foods in the United States. Its stock price, which had reached the heady heights of $96 just four months earlier, had declined by approximately 75 percent by the close of business Friday.
Suddenly, Diamond Foods is confronted not only with ongoing Securities and Exchange Commission and Justice Department investigations, but with a highly uncertain financial future. "The bankers are in control of their destiny now," said Louis Meyer, an analyst with Oscar Gruss & Sons in New York.
'Material weaknesses'
As of Friday, that was literally true. The internal audit's finding of "material weaknesses in the company's internal control over financial reporting" put Diamond in breach of its loan covenants. Its creditors, which include Bank of America, JPMorgan Chase and Barclays, could, if they chose, call in the loans, pushing Diamond into bankruptcy.
Mendes' ambitions for Diamond Foods were achieved with the help of mountains of debt. The acquisition of Pop Secret popcorn in 2008 and Kettle chips in 2010 were funded, in part, by approximately $200 million in loans. The Pringles deal was being financed, in part, by loans amounting to $1 billion.
Although the deal is said to be off - Bloomberg reported Friday that Procter & Gamble is seeking to pull out - Diamond is on the hook for a minimum of $50 million related to its costs and the costs of the various investigations, according to one conservative estimate, not to mention what the company may have to shell out for the banks to waive the debt covenant, including higher interest rates on the outstanding loans.
"From a banker's point of view, you could say things don't look hunky-dory," said Meyer.
The irony here is that the business Mendes was seeking to get away from - walnuts - was the one that brought him down. Specifically, $80 million of payments to walnut growers in the Central Valley and elsewhere in 2010 and 2011 were found by the internal audit to have been improperly booked in other years.
While the circumstances of the bookings are yet to be explained - Deloitte & Touche, the company's accountant, had initially given them the green light - it's been suggested that the adverse effect on Diamond's balance sheet from a correct booking would have made its stock price less attractive to Procter & Gamble shareholders, who were to be paid in Diamond stock for the Pringles acquisition.
Diamond's "corrective actions" announced last week included the immediate placing of Mendes and CFO Steven Neil on administrative leave. But they are most definitely not coming back. What connection they had to the payments affair is not known.
But, as Timothy Ramey, a food industry analyst at D.A. Davidson & Co., stated in a note on Wednesday, "both have a tough road ahead if they were personally involved in the situation."
Taking over the reins, temporarily, from Mendes is board member Rick Wolford, former CEO of San Francisco's Del Monte Foods.
"He's very well respected by bankers, and not afraid to tell them the unvarnished truth" about what has been going on inside the company, said Ramey in an interview Friday. Ramey covers Diamond Foods and is more bullish on the company's prospects than many other analysts in the wake of last week's bombshells.
"There's nothing broken with the business," he said, pointing to the otherwise strong sales and profit performance of the company. Pop Secret and Kettle, he believes, are now worth far more than the $800 million Mendes paid for them.
As for the hole left by the hard-charging Mendes, Ramey added, "no doubt he was critical, in many ways a visionary. He had some flaws. He may havwe been too aggressive, too ambitious - with the benefit of hindsight. But there's no reason why someone else can't step into the role and do just as good a job."
Managing the crisis
The only comment I got from Diamond Foods was a statement from Wolford from the public relations firms Sard Verbinnen, called in by Diamond for crisis management purposes.
"I look forward to contributing to Diamond's progress during this period of transition and, importantly, to continuing to build a successful future."
In July 2010, the business section of The Chronicle featured Mendes in a "Meet the Boss" column. In addition to what he described as his "extremely hard work ethic and exacting attention to detail," he talked fondly of the company's origins.
"I was always quite taken by these walnut farmers," he said. "It used to be it took a tree six or seven years to come to production. Then you have to farm for six or seven years to make enough money to cover the cost of the trees.
"You wouldn't even break even for 14 years. Then you hope the trees last for 45 or 50 years - now that's long-term planning." |
发表于 2012-2-8 17:55
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