Dean Foods Getting Milked by Antitrust Lawsuits

Allegations it conspired to improperly raise prices have dogged the dairy processor since the start of the new century.

Jan 7, 2014 at 6:45PM

For the country's biggest dairy processor Suiza Foods to acquire No. 2 rival Dean Foods (NYSE:DF) in 2001 and not run afoul of antirust laws, the dairy processor agreed to sell some of its bottling plants to National Dairy Holdings, a newly formed competitor controlled by Dairy Farmers of America and former Suiza executives.

After the Justice Department signed off on the $1.5 billion deal, Suiza took Dean Food's name (and is the company we know today), and with a combined $10 billion in annual sales, controlled 30% of the U.S. fluid milk market. 

Images

Source: SXC.hu.

It didn't take too long, however, for the fears held by opponents of the merger to be realized. According to a 2007 antitrust lawsuit filed against Dean, National Dairy, and DFA, while National Dairy was ostensibly created to be a Dean Foods competitor, because it was half-owned by DFA and had contracts to supply milk to Dean Foods, it was rife with conflicts of interest. The suit alleges the trio controlled 77% of processed milk bottling capacity in the Southeast and used that leverage to raise milk prices by not competing against one another. Because of their actions, milk prices rose nearly 8% between 2002 and 2007.

While a U.S. district court threw out all counts of the lawsuit against the three in 2012, a U.S. circuit court of appeals just reinstated the case, saying the lower courts erred in excluding expert testimony and ruled that the retail plaintiffs Food Lion and Family Foods had met the burden of proof to show there was "a genuine issue of material fact as to whether Dean Foods violated the antitrust laws." That doesn't mean the court said it was guilty, just that there was enough evidence for a case to proceed.

Dean and Dairy Farmers of America, along with other companies, settled a similar suit filed by Southeastern dairy farmers in 2007 for $303 million while agreeing to also change the way they did business. The Justice Department also filed an antitrust action against Dean in 2010 over its acquisition of the tiny Foremost Farms, but rather than fight about how it would help Wisconsin dairy farmers maintain a stable outlet for their milk, Dean simply sold it to settle the matter.

Milk consumption in the U.S. is on the decline. According to  the USDA, per-capita consumption is down 23% since 1975 while whole milk sales are down 58%. Although 2% and 1% milk sales have risen during that same time period, it hasn't been nearly enough to offset the overall drop.

In a bid to increase shareholder value during the slump, Dean spun off its growing organic milk division, WhiteWave Foods, while turning to value-added dairy products like chocolate milk to spur sales. As well it might, since flavored milk products have grown more than fivefold over the last 35 years.

Dean Foods is in the midst of a multiyear turnaround plan aimed at cutting costs, reducing debt, and improving overall operating efficiency. Having sold assets and used proceeds to improve its balance sheet, Dean is in a much better position today. While the antitrust lawsuit is a nuisance and milk remains a commodity business, it still produces high free cash flows and Dean's Fresh Dairy business trades at a substantial discount to WhiteWave Foods and other food companies like Kraft.

I find there's still plenty of strength in this milk processor, and when it's coupled with organic producer WhiteWave Foods, an investor's portfolio is fortified with the recommended daily allowance of dairy.

Drink in this opportunity in 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Rich Duprey owns shares of Dean Foods and WhiteWave Foods. The Motley Fool owns shares of Dean Foods and WhiteWave Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers