Seeking Alpha
What is your profession? ×
Long/short equity, special situations, value
Profile| Send Message|
( followers)

Shares of Dole Food (NYSE:DOLE) spiked up in Tuesday's trading session following the news that its 90-year-old CEO David Murdock is willing to take the company private. In response to the offer, shares rose more than 22% to $12.46 per share. The premium over the offer price implies that investors are betting on a counter bid or an improved bid from Murdock to convince shareholders to tender their stake. Given the mere 8% returns year to date, including Tuesday's returns, investors might speculate on a higher bid.

The Deal

Dole Food confirmed that is has received a proposal from Murdock to acquire all the remaining shares in the company not already owned by him and his family. Under terms of the proposal, Murdock is willing to pay $12 per share in cash for the company's shares. In response, the board of Dole has formed a special committee of independent directors to review and consider the proposal and its implications on the stakeholders. Ten years ago, Murdock took Dole private at an already respectable age of 80 years. Now he's willing to try it again. Murdock and his affiliates already own 40% of Dole's shares. The $12 offer values the equity in Dole around $1.1 billion, or about $1.5 billion including the assumption of debt

Following the announcement of the deal, shares trade with a 3.8% premium over the implied offer value. The sizable premium suggests that some investors are speculating about a possible improved bid, or a counterbid. To illustrate the need for a possible raised bid, representatives from Westchester Capital Management commented on the proposal: "a good starting bid and it's a sufficient bid to commence negotiations with the independent committee of the board." Westchester currently holds about 4.25% of Dole's stock.

Previous Encounters

In 2003, Murdock already acquired Dole for $33.50 per share in a deal with an enterprise value of $2.5 billion. Note that a comparison with today's operations is not justified given the recent divestitures of Dole. In 2009, Murdock took the company public again by offering shares at $12.50 per share, which implied a $1 billion valuation of the firm. This excludes the company's net debt position of around $1.5 billion at the time.

In April of this year, Dole sold its packaged foods and Asia fresh produce business to Japan-based Itochu for total proceeds of $1.7 billion. Following this deal, Dole will only operate its fruits and vegetable business in North America, and its fruits business in Latin America and Europe. While the proceeds are quite high, the activities generated 34% of total revenues for its fiscal 2011 and 56% of total operating income for the year. After the divestiture, Murdock become CEO of Dole again after stepping down in 2007. Former CEO DeLorenzo left the company after the sale of the activities to join Itochu.


Dole ended its first quarter of 2013 with $101.1 million in cash and equivalents. The company operates with $1.64 billion in total debt for a net debt position of $1.54 billion. Following the after-tax proceeds of the divestiture of the Asian activities and some other one-time costs, Dole operates with a net debt position of around $440 million.

First-quarter revenues, excluding the contribution from the packaged food and Asian produce business, came in at $1.05 billion, down 3.0% on the year. Adjusted EBITDA fell by 22% to $34.2 million. Excluding the impact of the divestiture of some German activities, legacy revenues were up by 8%. Adjusted EBITDA was impacted by $34 million in legal reserves regarding the European Union General Court Decision. As such the underlying trends were quite positive during the quarter.

Some Historical Perspective

Ever since its re-listing in 2009, shares have traded in a $8-$15 trading range. Shares rose from just $8 at the start of 2012 to peak at $14 later that year, but have fallen back to lows of $9 at the start of June.

In a rather uncommon move, Dole announced that it would cancel its $200 million share repurchase program, which was announced at the start of May. Instead it will use the cash to buy three refrigerated ships for $165 million, causing nerves among investors and analysts as the company announced the program just three weeks before canceling it.

Investment Thesis

Dole is the latest example of management taking advantage of cheap debt financing opportunities to buy troubled companies. Other high profile deals include that of Dell (NASDAQ:DELL) by its founder Michael Dell, and Schulze's attempt to acquire Best Buy (NYSE:BBY).

Having excellent vision on Dole's prospects and understanding the volatile nature of the business, Murdock is well-positioned to make up his opinion about the firm. Recently, Dole already indicated that adjusted EBITDA would come in around $150 million for the year, on the back of disappointing prices in bananas and berries. It remains to be seen if investors are willing to tender their shares at the midpoint of the historical trading range. While the offer represents a fairly decent premium compared to Monday's close, Dole's share price has been depressed in recent weeks on the back of the cancellation of the share repurchase agreement.

For now, investors are quite aggressively bidding on the prospects for a counterbid or a higher bid from Murdock. While a deal might possibly be closed at $12 per share, I would not rule out the possibility of a knock-out bid at $13-$15 per share to convince minority shareholders to tender their shares. With shares recently trading at $12.46, a very opportunistic long position might be worth the gamble.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.