Dean Foods (DF) has been calmly and methodically restructuring its business in order to get its debt situation under the realm of control. So far, this has resulted in two major actions: a public spinoff and the sale of a division to a Canadian food supplier. These two actions have accomplished the company's goals in that they have raised some much-needed capital and shed some much-not-needed debt. The next task that awaits Dean involves boosting its low-margin businesses. While it is by no means an impossible task, the company may have shot itself in the foot with its first two steps in trying to reach the third, and most important, stage of its business restructuring process.
Baby steps
Dean Foods management had the right idea: Instead of making a radical move to boost revenues and possibly endanger the near-century-old legacy business, the company decided to shed some of its layers and boost its capital base. This happened in two stages.
First was the spinoff of Dean's organic dairy and dairy-alternative company: WhiteWave Foods (WWAV). Over the last five years while under the Dean Foods umbrella, WhiteWave grew sales by 64%. This can be directly attributed to the rise in popularity of organic foods (WhiteWave owns the Horizon brand of organic milk, available at your neighborhood Whole Foods) as well as the overall trend toward healthier diets. WhiteWave also owns the Silk-branded dairy alternatives business. Silk offers soy-, almond-, and coconut-based milks and other dairy-esque products. WhiteWave accounted for less than a fifth of parent company Dean Foods' total sales, but at the same time made up 40% of its profits. The margins in the organic and alternative dairy business are obviously much higher than in the traditional, nonorganic dairy business.
Dean's CEO at the time, Gregg Engles, moved on to become WhiteWave's CEO while retaining the chairman position at Dean Foods. One could surmise that the chief of the company recognized where the future of the business was.
So even though Dean needed the cash, I am a bit curious as to why it would shed its most profitable businesses -- ones that could help make up for the awful, commodity-driven margins in the traditional dairy business. Couldn't there have been a better way?
Good Morning
The next step for Dean Foods was a long time coming. The company's Morningstar brand produced extended-shelf-life foods ranging from sour cream to meat-alternative entrees. This was another great business, perhaps not as lucrative as WhiteWave, but certainly better, again, than Dean Foods' dairy business. [Author's note: If you've guessed I am not a fan of the dairy business, you've guessed right.]
At the beginning of this week, Dean announced the $1.45 billion sale of Morningstar to Canada-based Saputo. Luckily for Dean Foods, it wasn't a fire-sale price (the company isn't in that dire of circumstances), and the move, together with WhiteWave, has accounted for a one-third reduction in net debt levels.
The problem now is that Dean Foods no longer has a fantastic organic business. It doesn't have an alternative dairy offering with which to answer the ever-declining consumption of milk in the U.S. And it doesn't have solid representation in Aisle 6, Frozen Foods. Dean Foods is now made up of the worst parts of the artist formerly known as Dean Foods—plain old milk.
Silver lining
One of the few things Dean Foods has going for it is its private-label business -- providing grocers with their own milk. In a recent article, I laid out the case for private-label goods, which have risen substantially in popularity since the Great Recession.
Since Dean is now a leaner, meaner, milk-machiner, it can potentially leverage the growth of the private-label industry into improved margins for its own business -- a move that would finally bring the company into a favorable debt position.
The bet
As far as an investment recommendation, Dean Foods is still a long ways away from achieving the balance sheet strength it needs to be an attractive stock. With a tremendous drought in the United States, costs are only higher for dairy farmers and will continue to pressure Dean Foods' margins in the near future. The company now is left with its toughest business to run.
On the other hand, WhiteWave would have been a great spinoff pick right out of the gates, but it was a bit richly valued. Since late October, the price has ticked down a bit to the mid teens. For a long-term play on the tremendous rise in organic food, there might be better choices out there.
