Should Dole Shareholders Step Back From Buyout?

All-things produce supplier Dole Food Company (UNKNOWN: DOLE.DL  )  has a banner year on the back of an early June buyout offer from its 90-year-old CEO and large shareholder, David Murdock. After a period of success following the initial sale of its Dole Asia business for nearly $1.7 billion in cash and then subsequent cost reductions, the company's stock fell in the early months of 2013 following the divestiture, which did not yield as strong of benefits as predicted. Now, the company holds a much lighter balance sheet, a more nimble business, an outstanding bid for $12 per share by Murdock, and a seemingly confused investor base. What should you do with Dole?

Weak earnings
Dole recently reported its second-quarter earnings, which were relatively disappointing. Net margins managed to grow a bit, while the higher-placed margins shrank. Revenue beat expectations, but net income missed. By most accounts, the earnings were relatively uninteresting, if on the negative side. But the market didn't react substantially, and the stock actually trades a dollar above Murdock's $12 offer.

So what do investors expect of Dole?

An interesting future
Dole going private, for the second time, takes little explanation. Murdock, the billionaire who runs the company and currently owns nearly half of it, wants the whole thing. He announced his offer after the stock had fallen sharply due to the reversal of a previously announced $175 million stock buyback, which had served as evidence that the Dole Asia sale would unlock shareholder value. But management actually put the money to better use than a payout -- it bought three new ships that will hold nearly 800 containers -- up from 491 with its current West Coast fleet. The ships will be more efficient and, in management's eyes, differentiate the company from its competitors.

The question is, will any of that benefit shareholders today, who may get bought out at $12 per share? Unlikely.

More interestingly is whether Murdock will increase his offer for the company, as requested by some activist shareholders or whether the company can continue to prosper as a public company.

A better tomorrow
Dole made a wise move in selling Dole Asia. For one, it greatly reduced debt, helping the company achieve a better earnings multiple. Furthermore, the packaged foods business is actually less profitable than its produce business. That may come as a surprise to some, since the price war in the banana industry has hurt Dole and its competitors for well over a year.

Some allege that Murdock undervalues his own company, using out of date information and includes one-time costs the company has recently incurred as part of his future financial projections. Dole's non-core assets, which include 25,000 acres on the island of Oahu, could be worth as much as $500 million -- nearly half of today's market cap.

The $12 offer appears to put Dole on a base-case scenario or one that assumes little upside. But given the cyclical nature of the business, the cost-cutting efforts just beginning to take effect, and its capex spending, Dole may have a much brighter future than it does today.

Investors are wise to look very closely at the Murdock deal -- as the market may be anticipating an increased offer price. The commodity-like produce business is not a pretty one, but Dole's story may get sweeter soon.


 

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