The IPO market goes bananas!
One of the most recognized food brands in the world with roots dating back over 150 years, Dole Food (DOLE) markets and distributes nearly 200 fruit and vegetable products in 90 countries. The company is looking to strengthen its balance sheet with a $500 million offering after a 2003 take-private transaction led by real estate mogul and then-CEO David Murdock left the firm saddled with a heavy debt burden. To speed its deleveraging, the company is also liquidating non-core assets and leveraging its powerful brand to gain traction in emerging markets, while focusing on value-added products such as packaged salads and fruit cups to boost its margins. The company plans to offer 35.7 million shares at a range of $13-$15. Goldman Sachs, BofA Merrill Lynch, Deutsche Bank and Wells Fargo are the lead underwriters on the deal, which is expected to price on 10/22 and begin trading Thursday on the NYSE under the ticker “DOLE.”
An a-PEEL-ing asset base
Dole Foods is “top banana” in many of its key markets, with the #1 market share in bananas in both North America and Japan as well as the leading share in US packaged fruit products. Its brand was introduced in 1933 and has impressive 68% unaided consumer awareness in the United States, more than twice that of its nearest competitor. Dole has state-of-the-art transportation and distribution infrastructure, including packing houses, manufacturing facilities and refrigerated containerships that help keep products fresh. Its integrated supply chain and sourcing network that span 25 countries allow DOLE to be the low cost producer in many of its major product lines.
The global fresh and packaged produce market is highly competitive and pressure from other large global producers, such as Chiquita Brands, Fresh Del Monte Produce and Del Monte Foods limits margin upside. At the same time, unpredictable growing conditions in various parts of the world result in volatile pricing, which has led to negative operating margins in the fresh vegetable segment as recently as 2007. Sales fell 11% y/y in the 1H09 as consumers reduced purchases and sought price concessions. Debt service has been a drain on free cash flow in recent years and Dole will remain relatively leveraged following the IPO (3.8x Debt/LTM EBITDA). Finally, the company faces material litigation related to European antitrust laws and past use of pesticides.
Ripe for success?
Going forward, Dole is counting on an improving economy reversing the negative volume trends seen so far this year. It also plans to expand in high-growth markets, such as China and Russia. On the cost side, it is pushing its value-added products, including packaged salads and fruit cups, to help lift its thin margins. Finally, it intends to continue to sell non-core assets (it estimates it has $400 million to sell) in order to pay down its high debt burden. While investors will no doubt appreciate Dole’s established brand and market share, they may be cautious about the company’s outlook, especially because the valuation offers little upside relative to its two closest peers, Chiquita and Fresh Del Monte. Therefore, although recent peer performance has been strong, investors are unlikely to go bananas over this deal.