Focus: IPO could see WhiteWave become takeover target

Food analysts on Wall Street have touted for nearly two years that Dean Foods, the US dairy giant, could spin off WhiteWave Foods, its soy and organic arm. This week, the company took the plunge.

Dean Foods will sell shares in up to 20% of The WhiteWave Foods Co. in an IPO in New York.

WhiteWave will own Dean Foods' WhiteWave-Alpro business, which sells soy and organic brands including Horizon Organic and Alpro in North America and Europe.

Following the listing, Dean Foods plans to still own as much as 80% of WhiteWave. It will distribute its interest in the business to its shareholders.

In November 2010, as Dean Foods reported a set of quarterly results that included a halving of its earnings year-on-year (sending its shares to a nine-year low) then JP Morgan analyst Terry Bivens asked Dean Foods chairman and CEO Gregg Engles whether the company could spin off WhiteWave-Alpro. "Somebody early on in my career told me not to answer too many theoretical questions," Engles replied.

However, just four months later, at the 2011 CAGNY investment conference in Florida, Engles indicated Dean Foods was open to the idea of a spin off. He wanted to get Dean Foods' debt down first.

Now, it seems, Dean Foods' debt has been cut to a level that gives Engles confidence both companies can prosper as separate entities. That and WhiteWave-Alpro's continued growth.

Engles said Dean Foods had "dramatically reduced our leverage over the last year".

"What we have long said was the impediment to affecting this transaction was the balance sheet. And so fundamentally, our decision to proceed now reflects our judgment that the balance sheet is in a position where we can affect this deal and do so in a way that leaves each of the separate companies with balance sheets that are appropriately suited for the conditions they'll experience and their need to be able to finance their growth going forward," Engles told analysts on Wednesday (8 August).

Proceeds from the offering, as well as $800-$925m to be borrowed under a new credit facility at WhiteWave, are expected to be used to reduce Dean Foods' debt.

Dean Foods, which in the autumn of 2010 was said by some analysts to be at risking of "tripping up" its debt agreements the following spring, will see its leverage ratio fall to around 3.5x at the end of 2012 when the IPO is scheduled, Engles said. WhiteWave Foods' leverage will be between 3 and 3.5x, he added.

The timing of the listing did cause questions, with a belief Dean Foods has yet to cut debts enough. "We are not surprised that the company would pursue this course of action, but we hadn't thought this would occur until its leverage meaningfully declined, which, at $3.6bn or about four times EBITDA, we'd argue it hasn't," Morningstar analyst Erin Lash told just-food.

Nevertheless, Dean Foods is pushing ahead with the plans and hopes to complete the listing by the end of the year.

Engles said WhiteWave-Alpro needed a separate company to capitalise on the "opportunities" he saw for the business.

"The key drivers are the de-leveraging of the business, but then the very, very strong performance through the first half of WhiteWave-Alpro," he said. He added there was a "need for a separate capital structure and a separate currency in order to fully to take advantage" of the potential for a company that will own brands including Horizon Organic, Silk and Alpro.

Engles said the Colorado-based WhiteWave-Alpro was a "value-added dairy alternative" unit "within what was a more commoditized, lower-margin business of Dean Foods".

"We intentionally moved it 800 miles from our corporate and dairy group headquarters in Dallas so that it would have a separate identity, and we recruited top talent out of the CPG worlds in order to build our management ranks and then we invested relatively heavily in capabilities that you would expect: consumer insights, research and development, world-class brand marketing," he said. "What we have as of today is a business that is built around large, national-scale brands, brands with several hundred million dollars each in terms of aggregate revenue and supported by a very well-invested and largely new national manufacturing footprint. We built it to be a best-in-class consumer packaged goods company, and I think that's what we have."

Of course, listing what Engles deems to be such an attractive business (and one which he will lead as chairman and CEO) could make it a takeover target.

"From our perspective, this valuable asset could be scooped up by another packaged food firm before too long," Lash says.

"We think interested buyers may include Danone, Nestle and potentially even General Mills, which acquired Dean's domestic yogurt business last year. At first blush, and assuming 12 times forward EBIT (the average for Morningstar's packaged food coverage universe), we think WhiteWave-Alpro could garner a price tag of $2.4-2.8bn."