Last Friday, Dean Foods (DF) spun-off one of its three business segments, WhiteWave (WWAV). The IPO was a success since it was priced above the indicated range of $14-$16 at $17. Dean will receive $391 million from the IPO sale of 23 million Class A shares. Dean will use the proceeds to pay off debt. Dean will continue to hold 150 million of Class B shares.
Class A and Class B are exactly the same except:
- Class A has 1 vote per share. Class B has 10 vote per share.
- Class B also can or will be converted into Class A shares under certain circumstances.
In a surprising twist, Dean shares fell $2.05 or almost 11% to close at $16.74. The lower price gives the astute investor a chance to buy an undervalued company at a great price. Based on sum-of-parts analysis, Dean is worth between $20 to $23.
WhiteWave sells such products as Horizon Organic milk and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave is focused on products that cater to the growing health conscious crowd.
WhiteWave is worth $2.5 billion or $13.50/share based on that fact that Dean holds 150 million Class B shares. Dean has stated that it will distribute the shares no earlier than 180 days following the closing of the IPO.
Obviously, the risk here is that the valuation is dependent on the price of WhiteWave. WhiteWave is highly valued at over 33 times 2011 net income. However, the company is growing revenue and earnings at double digit rates. They recently announced that for the third quarter of 2012, they grew revenue at 13% and operating earnings at 22%. They also have some of the top brands in the industry.
The other risk is that when Dean does distribute the 150 million WhiteWave shares, it could put pressure on the stock price.
Morningstar is a leading warehouse delivery dairy business that produces and sells traditional and specialty items, including cultured dairy products, ice cream mixes, coffee creamers, aerosol whipped toppings, traditional and value-added milks, and blended iced beverages to retailers and food service providers nationwide.
Morningstar is on the selling block. There was a Reuters report this past Thursday that there are multiple suitors for the company with a price tag of $1 billion to $1.5 billion.
Let's assume it gets sold for $1 billion in the worst case and $1.25 billion in the best case. In both cases, let's assume Dean uses $500 million of the proceeds to pay off debt and the rest to distribute to shareholders. So, shareholders get $500 million or 2.70/share to $750 million or $4.05/share.
Some have speculated that they will use the full proceeds from Morningstar sale to pay down debt. However, this does not make any financial sense. If they did that, they would be borrowing nothing on their senior credit facility. They have the ability to borrow a maximum ratio of debt to EBDITA of 5.5. Due to WhiteWaves IPO, the ratio will be less than 3.4. If they contribute $500 million from the Morningstar sale, their leverage ratio will remain around 3.4. If they contribute the full $1 billion, their leverage ratio will be 2.3. I could see them possibly contributing a maximum of $700 million, but nothing more.
Fresh Dairy Direct
Fresh Dairy Direct is one of the nation's largest processors and direct-to-store distributors of fluid milk marketed under more than 50 local and regional dairy brands and private labels. Fresh Dairy Direct also distributes ice cream, cultured products, juices, teas, bottled water and other products.
Here is the valuation based on FCF:
- Operating Income will be over $400 million in 2012 even with higher commodity prices in 2012. They earned $226 million for the first half of 2012
- Interest Expense. They will have $1.6 billion in debt. $1.13 billion of that will be senior notes and the rest of it will be the senior credit facility. This is based on the assumption that they use IPO proceeds and $500 million from the Morningstar sale to pay off debt.
- Corporate Expense includes things such as non cash share based expense. The company had $210 million corporate expense for the whole company in 2011. So, $150 million is a conservative estimate.
- One time expenses includes such things as litigation expense, facility closing and reorganization costs that they seem to have every year.
- Added $60 million to net income for FCF because they will have less capital expenditure compared to depreciation.
If Fresh Dairy Direct gets a multiple of 5 to 8 times FCF, the value is $635 million to $1,016 million or $3.4 to $5.49.
Adding all that up, I get a valuation range of $19.6 to $23.04. At the current price of $16.74, Dean is significantly undervalued.
Disclosure: I am long DF.