By Martinne Geller and Jessica Wohl
(Reuters) - Kellogg Co agreed to buy Pringles potato chips from Procter & Gamble Co for $2.7 billion in a cash deal that will almost triple its international snack business, sending its shares higher.
The transaction will also let household goods maker P&G leave the food business after its agreement with Diamond Foods Inc fell apart.
Shares of Kellogg, which is aiming to expand a snack portfolio that already includes Keebler cookies and Townhouse crackers, rose 4 percent.
Adding Pringles salty chips to the mix will increase the size of Kellogg's snack business to where it will account for as much of total revenue as its well-known cereal business.
P&G agreed to sell Pringles to Diamond Foods Inc last year, but that deal fell apart this month following the discovery of improper accounting that led Diamond to replace its chief executive and finance chief. The U.S. government is looking into Diamond's accounting practices.
"With the results of their audit committee investigation and the management change, that was no longer feasible," P&G Chairman and Chief Executive Bob McDonald told reporters gathered in Cincinnati for a P&G event.
The companies expect the deal to close by this summer.
Both companies declined to say when their discussions started.
"We've had options," P&G's McDonald said.
Pringles will become Kellogg's second-largest brand behind Special K, McDonald said.
"They are looking to establish a global snacks business on par with their global cereals business and Pringles will be a big part of that," McDonald said.
When Kellogg CEO John Bryant was asked why his company did not buy Pringles when it was up for sale last year, he said it was hard to compete with the Diamond offer.
Also, Kellogg is now more interested in growing its international snack business than it had been, he said.
While Pringles was a revenue-driver for P&G, bringing in about $1.5 billion a year in sales, it was the only remaining food business and no longer fit in with the company's focus on items such as beauty and personal care products.
In recent years, P&G also sold off its Folgers coffee business and Jif peanut butter.
P&G said the deal would lead to an after-tax gain from the deal of $1.4 billion to $1.5 billion, or 47 cents to 50 cents per share, about the same amount estimated when it first announced the deal with Diamond in April 2011.
About 1,700 P&G employees will move to Kellogg.
Kellogg will borrow $2 billion to complete the deal and expects to limit its share repurchase program for about two years. Excluding one-time costs and the impact of reduced buybacks, the deal will add 8 to 10 cents per share to Kellogg's earnings in 2012 and 22 cents to 25 cents in 2013, Kellogg said.
Including those items, the deal will lower Kellogg's earnings per share in 2012 by 11 to 16 cents.
P&G said that if the deal gets done this fiscal year, it would earn $3.77 to $3.93 per share including the one-time gain from the deal. P&G plans to update its core earnings per share guidance for the current third quarter and fiscal 2012 when it speaks with analysts at a conference on February 23.
Kellogg shares were up 4 percent at $52.32 in early trading.
(Reporting by Jessica Wohl in Cincinnati, Martinne Geller and Phil Wahba in New York; Editing by Lisa Von Ahn, Dave Zimmerman)