Dean Foods to Offload Morningstar - Analyst Blog
September 27 2012 - 8:30AM
Zacks
Leading processor and distributor
of milk and other dairy products, Dean Foods
Company (DF) is looking for buyers for its Morningstar
business. The investors appreciated this decision of the company,
which reflected in its share price that closed 5.46% higher at
$16.23 on September 27, 2012, from the previous day’s close price
of $15.39.
Dean Foods has appointed investment
bank Evercore Partners Inc. (EVR) to crack a deal
for maximizing shareholders’ value as well as ensure future success
of the business. The company has not disclosed any information
relating to the amount it is expecting from the transaction.
However, the deal is likely to fetch around $1 billion.
Morningstar sells branded and
private label other dairy products under brands such as Country
Fresh, Dean’s, Garelick Farms, Mayfield and Oak Farms. During
fiscal 2011, this segment contributed approximately 10% to the
company’s total net sales.
Dean Foods has always been
committed to explore strategic alternatives that enhance
shareholders’ value. Last month, concurrent to its earnings results
for the second quarter of fiscal 2012, Dean Foods announced to
issue IPO of its wholly-owned subsidiary, The WhiteWave Foods
Company. The company intends to dilute its 20% stake in the
subsidiary and obtain around $300 million. The proceeds are
expected to be used for lowering its debt level. As of June 30,
2012, the company has total long-term debt outstanding of $3,552
million.
The dilution process is anticipated
to complete during the fourth quarter of the ongoing fiscal and
will lower the company’s year-end leverage ratio to nearly 3.5x
debt to EBITDA, as defined by its credit agreements.
Our
Recommendation
We believe Dean Foods has taken
strategic steps to optimize its capital allocation and concentrate
on core business activities. Following this, during fiscal 2011,
the company divested its underperforming business unit operations
of dairy processing facility in the Southeast. We may see more
closures in future towards creating value for shareholders.
Moreover, Dean Foods continues to
make headway in its efforts to achieve the lowest cost position in
the industry. The company has benefited from its continued focus on
cost reduction initiatives across the businesses, including
headcount reductions.
It has already achieved its
targeted total cost savings of $300 million in fiscal 2011 under
the cost reduction program started in 2009. Further, we expect in
fiscal 2012 the company will continue to move aggressively toward
streamlining its cost structure and may save in line with or more
than the fiscal 2011 savings.
On the flip side, in recent years,
the consolidation of the retail grocery industry has led to
increased competition among dairy product suppliers. In such a
situation, Dean Foods faces stiff competition at the processor
level, in all major product lines and geographic markets. The
company competes mainly with Kraft Foods Inc.
(KFT) and ConAgra Foods Inc. (CAG).
Currently, Dean Foods holds a Zacks
#2 Rank, implying a short-term Buy rating on the stock. However, we
remain slightly cautious on the stock and uphold our long-term
‘Neutral’ recommendation, waiting to see further catalysts before
becoming more positive on the stock.
CONAGRA FOODS (CAG): Free Stock Analysis Report
DEAN FOODS CO (DF): Free Stock Analysis Report
EVERCORE PARTNR (EVR): Free Stock Analysis Report
KRAFT FOODS INC (KFT): Free Stock Analysis Report
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