Dean Foods To Spin Off White Wave

By Will Ashworth | October 18, 2012 AAA

One of America's largest producers of dairy and non-dairy beverages, Dean Foods (NYSE:DF), announced October 17 that it was selling up to 23 million newly created Class A shares of its Whitewave Foods Company subsidiary between $14 and $16 a share. The pricing of its spinoff put a fire under its stock price, sending it up more than 10% on the day. This is great news for shareholders. I'll examine what investors should do with the news.

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Reach Its Potential
Dean Foods has got to be one of my most disappointing recommendations of 2009. Back in July of that year, I wrote an article in which I spoke highly of the company and its organic and natural foods business operated by Whitewave Foods. I finished the article by stating, "This tells me management is pressing on with its healthy agenda. I for one think they'll do just fine and eventually so too will its stock." Under no circumstances did I think it would face the kind of implosion that took place in 2010. It's taken almost three years to get back anywhere near where it was trading when I first recommended its stock. The Whitewave IPO tells me Dean Foods is ready to make the move into the 20s, finally reaching its potential.

Why Spin Off?
As you can see by its stock price, Dean Foods has been stuck in the mud for a while now. By taking Whitewave public, the company immediately receives up to $282 million in net proceeds (Whitewave would keep the over-allotment of $42 million) from the share offering, as well as Whitewave assuming $885 million of its debt. Not to mention Whitewave's existing $453 million in debt assigned to it when it acquired Alpro, a producer of plant-based food & beverage alternatives in July 2009. Dean Foods will reduce its long-term debt by 33% to $2.39 billion. In addition, the company will spin off on a tax-free basis at least 80% of their remaining interest in WhiteWave immediately after its 180-day lock-up agreement expires.

Assuming the underwriters exercise their over-allotment, the market cap of Whitewave at the high-end of the range $16 per share is $2.78 billion. Add to that $1.2 billion in debt and subtract $83 million in cash and you come to an enterprise value of approximately $3.9 billion. Its pro-forma EBITDA for the first six months ended June 30 is $111.4 million; annualize this and then discount by 10% because of stand-alone expenses and you get $200.5 million in pro-forma EBITDA in 2012, which suggests an enterprise value (EV) of 19.5 times EBITDA. Its two closest peers - Annie's (NYSE:BNNY) and Hain Celestial Group (Nasdaq:HAIN) - have enterprise values that are 37.8 and 17.4 times EBITDA, respectively. Given that Annie's is among the top performing IPOs in 2012, up approximately 140%, it makes sense for Whitewave to see some interesting action once it IPOs.

What's Left?
Dean closed trading October 17 at $16.96, up 12.8% on the day. At current prices, its enterprise value less Whitewave is $2.47 billion, with an EBITDA (TTM) of $814 million, a valuation multiple of just three times. In late September, it revealed that it had hired Evercore Partners (NYSE:EVR) to find a buyer for its Morningstar business, which specializes in private label and food service creamers and other milk-related products. Revenues in 2011 were $1.3 billion. Some suggest that the company could fetch more than $1 billion when all is said and done, leaving its Fresh Dairy Direct segment (legacy business) as the sole survivor. In the first six months of 2012, the segment had an operating profit of $226.4 million or 5% of sales compared to an operating margin of 3.7% in 2011. Based on an operating margin of 5% for the entire 2012, Fresh Dairy Direct should generate operating income of $450 million on $9 billion in revenue. Subtract $100 million (a very rough estimate) for corporate expenses, $170 million in interest expense and $65 million for taxes and its net income for 2012 is $115 million or 62 cents a share.

The Bottom Line
After the spin-off of Whitewave and the sale of Morningstar, shareholders will be left with a business that has pretty slim margins. That's OK, because in the process of unlocking value for shareholders, it's delivered at least $1.2 billion in debt reduction, $1 billion or more in cash and potentially more than $13 per share in Whitewave stock in six months' time. Added together, its theoretical value is approximately $25, almost 40% higher than its current price. This is a bet worth taking.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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