Is a Dean Foods sale on the cards? US dairy giant initiates transformative “strategic review”

28 Feb 2019 --- US dairy giant, Dean Foods Company, has revealed it is “reviewing strategic alternatives to accelerate business transformation” and is exploring a number of options, including a potential sale. The review could also include selling some of its brands, forming a joint venture, a strategic business combination, a transaction that results in private ownership or the “continued execution of the company’s business plan” – or possibly a combination. The company is struggling with falling milk consumption in the US and the announcement comes as it reports fourth quarter and full-year 2018 results with wider-than-expected losses.

The company has also suspended its shareholder dividend in the wake of worst-than-expected results, but company CEO Ralph Scozzafava is promising a turnaround by reshaping the company to be more agile and competitive in the marketplace.

Click to EnlargeDean Foods processes milk across the US under a number of regional and national brands.The Texas-headquartered company’s products include milk, ice cream, dairy products, juice and teas. It processes milk across the US under a number of regional and national brands such as DairyPure, TruMoo, Friendly's, Mayfield, Meadow Gold and Barber's. Dean Foods has been significantly impacted by shifting consumer preferences towards non-dairy alternatives and private-label products. 

Previously, the company has divested some of its dairy plants but has also made its own moves into plant-based alternatives. 

In July 2018, Dean Foods Company increased its ownership percentage and took a majority stake in Good Karma Foods, a brand of flaxseed-based milk and yogurt alternatives. The investment marked Dean Foods’ commitment to plant-based foods and beverages having previously entered the plant-based beverages category in 2017. 

Losses were highlighted in the company’s results which include Q4 gross profit being slashed by US$64 million, or nearly 15 percent, from the year-ago quarter. Full-year net loss from continuing operations of US$3.63 per share and adjusted net loss from continuing operations of US$0.47 per share. 

The company noted that the results “reflect a rapidly changing retail environment coupled with anticipated customer volume losses.” It is also refinancing its debt capital structure to include a multi-year revolving facility, secured by the company’s real estate and other assets, and an amended receivables securitization facility, each of which will allow for covenant flexibility and extended maturities.

In the fourth quarter, Dean Foods’ volume was down significantly year-over-year. 

Full year 2018 adjusted gross profit was US$1.7 billion. For Q4, the company reported US$384 million in adjusted gross profit, a decline of 14 percent versus prior year.

In Q4, raw milk costs were up 6 percent sequentially versus Q3 and down 6 percent versus a year ago. Looking to the remainder of 2019, the US Department of Agriculture (USDA) continues to forecast the supply increase by approximately 1 percent versus 2018.

Scozzafava explains how the company’s 2018 financial results reflect volume deleverage from “certain customers exiting our business,” coupled with significant inflation in fuel, freight and resin costs.  

Click to EnlargeThe Dean Foods portfolio includes national brands such as DairyPure, TruMoo, Friendly's, Mayfield, Meadow Gold and Barber's.“While we made significant progress executing our enterprise-wide cost productivity plan, the cost savings were mitigated by incremental transitory costs associated with a recent comprehensive plant consolidation. Despite these challenges, we continued to generate positive free cash flow from operations in 2018,” he says. 

“Dean Foods is one of the nation’s largest dairy providers and we have an opportunity to leverage our scale and substantial assets to deliver value for our shareholders. With our large domestic footprint and direct-to-store delivery network, along with our national brands and strong private label capability, we have a solid foundation to drive improved financial and operational results,” he continues.

“We are taking important actions to reshape the company to be more agile and more competitive in the marketplace. In tandem, to enhance shareholder value and accelerate our business transformation, we have initiated a review of strategic alternatives.”

The company has also successfully refinanced its credit facilities to provide enhanced financial flexibility and is working diligently on a company transformation, Scozzafava adds.

“We are confident that we are taking the right steps to more effectively compete and win in 2019 and beyond,” he concludes optimistically. 

Dean Foods Company declined to comment further when FoodIngredientsFirst reached out for more details on the review. 

Dean Foods Company – which spun off WhiteWave Foods, the maker of Horizon Organic and Silk Soymilk, as a standalone company in May 2013 – is one of the latest food and beverage giants to announce a strategic review, pivoting its businesses to better adapt to changing market conditions.

Dean Foods’ review also closely follows other consolidation in the dairy industry last week when Canadian headquartered dairy giant Saputo Inc. reached an agreement to acquire UK dairy group Dairy Crest Group plc for approximately £975 million (approximately US$1.27bn). 

Amid mounting skepticism over who might be interested in buying a flagging company,  all eyes are now on Dean Foods’ next move. Some analysts are already claiming that a shrinking milk business is not a very attractive prospect and do not foresee many companies lining up to acquire the largest milk processor in the US. And, if they did, any deal would likely be at a discount to the current share price.

By Gaynor Selby

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