Leading processor and distributor of milk and other dairy
Dean Foods Company
) is looking for buyers for its Morningstar business. The investors
appreciated this decision of the company, which reflected in its
share price that closed 5.46% higher at $16.23 on September 27,
2012, from the previous day's close price of $15.39.
Dean Foods has appointed investment bank
Evercore Partners Inc
) to crack a deal for maximizing shareholders' value as well as
ensure future success of the business. The company has not
disclosed any information relating to the amount it is expecting
from the transaction. However, the deal is likely to fetch around
Morningstar sells branded and private label other dairy products
under brands such as Country Fresh, Dean's, Garelick Farms,
Mayfield and Oak Farms. During fiscal 2011, this segment
contributed approximately 10% to the company's total net sales.
Dean Foods has always been committed to explore strategic
alternatives that enhance shareholders' value. Last month,
concurrent to its earnings results for the second quarter of fiscal
2012, Dean Foods announced to issue IPO of its wholly-owned
subsidiary, The WhiteWave Foods Company. The company intends to
dilute its 20% stake in the subsidiary and obtain around $300
million. The proceeds are expected to be used for lowering its debt
level. As of June 30, 2012, the company has total long-term debt
outstanding of $3,552 million.
The dilution process is anticipated to complete during the
fourth quarter of the ongoing fiscal and will lower the company's
year-end leverage ratio to nearly 3.5x debt to EBITDA, as defined
by its credit agreements.
We believe Dean Foods has taken strategic steps to optimize its
capital allocation and concentrate on core business activities.
Following this, during fiscal 2011, the company divested its
underperforming business unit operations of dairy processing
facility in the Southeast. We may see more closures in future
towards creating value for shareholders.
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, including headcount reductions.
It has already achieved its targeted total cost savings of $300
million in fiscal 2011 under the cost reduction program started in
2009. Further, we expect in fiscal 2012 the company will continue
to move aggressively toward streamlining its cost structure and may
save in line with or more than the fiscal 2011 savings.
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
Kraft Foods Inc.
ConAgra Foods Inc.
Currently, Dean Foods holds a Zacks #2 Rank, implying a
short-term Buy rating on the stock. However, we remain slightly
cautious on the stock and uphold our long-term 'Neutral'
recommendation, waiting to see further catalysts before becoming
more positive on the stock.
CONAGRA FOODS (CAG): Free Stock Analysis Report
DEAN FOODS CO (DF): Free Stock Analysis Report
EVERCORE PARTNR (EVR): Free Stock Analysis
KRAFT FOODS INC (KFT): Free Stock Analysis
To read this article on Zacks.com click here.