Earlier this year, I recommended selling Whole Foods (Nasdaq: WFM ) and short-selling The Fresh Market (NYSE: TFM ) , arguing that Whole Foods is expensive by most valuation metrics, while Fresh Market is expensive and isn't as good of a business. But regular readers, bless them, know that I'm still bullish on the organic, healthy-food industry in general. They also know that I'm a big fan of interesting spinoff situations, which is why I'm so excited by the recent announcement from Dean Foods (NYSE: DF ) that it will spin off its WhiteWave-Alpro division, which produces healthy dairy and dairy-substitute brands such as Horizon Organic and Silk.
Finally, an organic-milk pure play!
Organic foods are the shining spot in an otherwise dull grocery industry. While a traditional stalwart like Safeway (NYSE: SWY ) has barely grown revenue in the past five years, the more organic-leaning Whole Foods has seen sales grow by 69%. Just last year, growth in organic-product sales was double that of their conventional counterparts, and at just 4.2% of food sales, there's still room to grow. That presents a huge opportunity for investors, but the difficulty is in finding a way to actually invest. As I noted in an article last year, most organic farms and product manufacturers either are privately owned, are run by co-ops, or have been swallowed up by some colossal conglomerate.
WhiteWave is a prime example. It's the largest supplier of organic milk in North America, and its Silk brand completely dominates the soy milk market, with 75% market share. And although soy milk's share of the alternative-milk market is declining, WhiteWave isn't sitting on its laurels. In 2009 it entered the almond milk market, which is rapidly gaining share from soy. Silk's PureAlmond line was ranked in the top 2% of all consumer packaged food and beverage launches between 2007 and 2011 in terms of sales, a remarkable feat considering the flood of new products hitting the shelves every year.
The spinoff situation
So far, there aren't many details on how the spinoff will play out. It is expected to happen sometime in the fourth quarter of this year and is currently valued at around $1.5 billion, but that may be subject to change, and no share price or number of shares has been set yet.
What we do know is that the spinoff will initially be structured as an IPO, with Dean Foods selling a 20% stake in WhiteWave for $300 million and then distributing the remaining 80% as a tax-free distribution to Dean Foods shareholders after a lockup phase. That means an interested investor has two avenues to ownership, depending on whether he or she wants to own both companies or just WhiteWave. A number of studies have shown that both spinoffs and their parents tend to outperform the S&P 500 in the few years following, so it would seem advantageous to buy Dean Foods now and hold the shares when they're distributed.
However -- and this is a big "however" -- Dean Foods' stock leapt an incredible 36% last week after announcing the spinoff. While that served only to erase a month's worth of steep declines that were probably related to skyrocketing corn prices, the stock is still up nearly 50% this year, putting the company at a high enterprise value-to-free cash flow ratio of 30.
On the other hand, the $1.5 billion IPO valuation is only 14 times WhiteWave's 2011 operating income, low for a company with rapid growth. Furthermore, both companies will probably see selling pressure after the spinoff is completed, as index funds will probably dump their new WhiteWave shares while other investors dump their Dean Foods shares, no longer needing them to get at WhiteWave. That could make both companies a real bargain. I'm not making a CAPScall just yet, but you should add Dean Foods to My Watchlist today to stay updated as more spinoff details come out.