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. 


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.