The share price of
Dean Foods Company
(
DF
) closed at $16.96 on October 17, 2012, 12.77% higher than the
previous close of $15.04, after the company provided a positive
update on its planned initial public offering (IPO) of its
wholly-owned subsidiary - The WhiteWave Foods Company - along
with a solid WhiteWave-Alpro segment's preliminary sales result
for third-quarter 2012. During the trading hours, the stock
touched a high of $17.25.
Yesterday, the company announced that it has filed an
amendment relating to its pending registration statement
regarding the IPO of its wholly-owned subsidiary with the U.S.
Securities and Exchange Commission ("SEC").
In August 2012, Dean Foods decided to go for an IPO of up to
20% of its wholly-owned subsidiary's common shares and had also
made relevant filings to register it with the SEC. Subsequent to
the IPO, The WhiteWave Foods Company will own Dean Foods'
WhiteWave-Alpro business, while Dean Foods will hold a minimum of
80% of The WhiteWave Foods Company's shares.
Additionally, Dean Foods intends to use the proceeds from the
offering as well as about $800-$925 million, planned to be
borrowed under The WhiteWave Foods Company's new credit facility,
to reduce its debt levels. Consequently, upon the closure of the
transaction, the company expects to lower its year-end leverage
ratio to nearly 3.5x debt to EBITDA, as defined by its credit
agreements. The company expects to complete the transaction in
the fourth quarter of 2012.
Concurrent to the filing update, Dean Foods also provided the
preliminary sales results of its WhiteWave-Alpro segment for
third quarter. Driven by robust volume growth, the company
anticipates total sales of the segment to increase 13% to $598
million from $531 million in the year-ago period.
The year-over-year volume growth is primarily benefited from
its continued focus on product innovation and increased marketing
investments. Moreover, operating income is expected to increase
by 22% to $64 million from $53 million in the prior-year
period.
In an effort to concentrate on core business while enhancing
the shareholders' value, the company is going through a mega
restructuring process. Last month, Dean Foods announced that it
is looking for buyers for its Morningstar business. If it is able
to finalize a deal, the company is likely to fetch around $1
billion.
Our Recommendation
We believe that Dean Foods has taken strategic steps to
optimize its capital allocation and concentrate more on core
businesses. The decision to go for an IPO for its subsidiary will
provide Dean Foods access to capital for funding growth, enhance
its liquidity position, maximize its value, and improve debt
finance.
Moreover, Dean Foods continues to make headway in its efforts
to achieve the lowest cost position in the industry. The company
has benefited from its continued focus on cost reduction
initiatives across the businesses.
On the flip side, in recent years, the consolidation of the
retail grocery industry has led to increased competition among
dairy product suppliers. In such a situation, Dean Foods faces
stiff competition at the processor level in all major product
lines and geographic markets. The company competes mainly
with
ConAgra Foods Inc.
(
CAG
).
Dean Foods currently has a Zacks #3 Rank, implying a
short-term Hold rating. Moreover, we are maintaining a long-term
Neutral recommendation on the stock.
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