Dean Foods, the under-pressure dairy major, hopes filing for Chapter 11 and a possible takeover offers the best route forward for the business – but plenty of questions still remain. Dean Best reports.
It really is a tale that caught the eye – but it is also one that felt, in many ways, grimly inevitable.
On Tuesday (12 November), Dean Foods, the under-pressure US dairy major, announced it had started voluntary Chapter 11 proceedings.
Amid falling milk consumption and rising competition – particularly in the private-label market – Dean Foods has seen sales and profits hit.
The owner of the DairyPure milk brand and TrueMoo flavoured milks posted a net loss of US$327.4m last year based on revenues of $7.76bn. In 2011, Dean Foods generated sales of $13.1bn.
In February, the company announced a strategic review of the business. Seven months later, Dean Foods said it had decided to press ahead with an internal transformation programme under recently-appointed chief executive Eric Beringause rather than pursue previously suggested options of a sale or joint venture.
Alongside news of the Chapter 11 proceedings, Dean Foods revealed it was in talks to sell up to local peer Dairy Farmers of America.
“The actions we are announcing today are designed to enable us to continue serving our customers and operating as normal as we work toward the sale of our business,” Beringause said today. “Since joining the company just over three months ago, I’ve taken a hard look at our challenges, as well as our opportunities, and truly believe we are taking the best path forward.”
Dean Foods, which has started the Chapter 11 proceedings in Texas, where the company is based, has received a commitment of around $850m in debtor-in-possession (“DIP”) financing from some of its existing lenders, led by Rabobank.
Yesterday, the company received court approval for motions related to the Chapter 11 petitions, namely to access up to $475m of that $850m of finance, enabling the business to support its operations, including paying staff and suppliers.
As mentioned, Dean Foods is in “advanced discussions” with Dairy Farmers of America – another of the largest dairy businesses in the US – over a potential sale of “substantially all” the company’s assets. If the parties strike a deal, a sale would be subject to regulatory approval and to higher or otherwise better offers in the bankruptcy.
Beringause added: “Since joining the company just over three months ago, I’ve taken a hard look at our challenges, as well as our opportunities, and truly believe we are taking the best path forward. In recent months, we have put in place a new senior management team that not only has considerable experience in the dairy and consumer product industries, but also in executing major turnarounds. I am confident we have the right people in place to lead us through this process.”
Asked why Dairy Farmers of America is interested in buying a business that has been under so much pressure, Monica Massey, executive vice president and chief of staff at the co-op, pointed to the relationship between the two companies.
“As Dean Foods is DFA’s largest customer, our focus is ensuring we have secure markets for our members’ milk,” Massey told just-food on Tuesday. “Thanks to the strategic planning and management by our farmer board of directors and management team, the cooperative is in a financial position to withstand a situation like this.”
What has gone wrong at Dean Foods? The company and the wider dairy industry have been faced for years with falling demand for liquid milk in the US has been shrinking. US government data showed per capita, annual, milk consumption hit a 40-year low in 2018.
Branded liquid-milk has also become less important to US consumers, with private-label growing but demand for those contracts intensifying.
Companies including Dean Foods have reacted by shutting plants by the milk industry has still been beset by excess capacity.
That said, overall dairy consumption is growing, buoyed by other parts of the market such as butter and cheese riding renewed consumer interest for reasons for health.
Meanwhile, demand for dairy alternatives, though lower than conventional dairy, is rising. In 2012, Dean Foods spun off organic dairy and, crucially, dairy-alternative business WhiteWave Foods. Four years later, Danone snapped up WhiteWave in a deal that valued the business at around $12.5bn.
The Dean Foods’ product portfolio was not matched to the new realities of the US dairy market. The company tried, making minor moves, such as buying a majority stake in Good Karma Foods, which makes flaxseed-based milk and yogurt alternatives. Dean Foods invested in ice cream but found itself outflanked by super-premium or low-calorie offerings.
And, as sales curdled, and the company’s finances struggled, it had less and less room to make strategic moves to reshape its business. Dean Foods’ debt load stands at circa $1.1bn.
“Today’s filing is not entirely surprising given Dean Foods’ compressed profitability and the fact that it failed to find better alternatives (strategic/financial buyers for all or partial sale of the company) or mechanism to unlock the value of its physical assets, particularly its national cold chain distribution network, during a six-month strategic review and CEO transition,” Amit Sharma, an equity analyst who has been covering Dean Foods for BMO Capital Markets, said on Tuesday.
In Dean Foods’ most recent financial quarter, the company posting another loss, booking $79.3m, up from $26.4m a year earlier. Nine-month losses stood at $205.3m, versus $66.8m in the corresponding period the previous year.
Third-quarter net sales were $1.85bn, against $1.89bn a year earlier. Dean Foods said its nine-month sales were $5.49bn, against $5.83bn in the first three quarters of 2018.
Dean Foods’ commentary on the third quarter further underlined the challenges the company is facing. “Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and other volume pressure,” it said.
Massey at Dairy Farmers of America sought to highlight how important Dean Foods is to the co-op and the farmers that supply it. But, looking forward, should a deal be found and then approved by regulators (and there be some concerns about the impact a combination of Dairy Farmers of America and Dean Foods could have on prices for milk farmers), what could be the further benefits to the co-op?
Dairy Farmers of America, which generated a net income of $108.5m in 2018 on the back of net sales of $13.6bn, has brands of its own including the regional Borden Cheese and Keller’s Dairy. Owning 42 plants across the US, Dairy Farmers of America also acts as a supplier of dairy ingredients to food processors, including Dean Foods.
To take on a business like Dean Foods, no matter how little Dairy Farmers of America may have to pay (looking at the Dean Foods’ share price), and strategically further embed itself downstream in the more consumer-facing parts of the US milk market that’s had its challenges for a number of years, seems an interesting move.
Wells Fargo analyst John Baumgartner believes Dairy Farmers of America could be able to continue Dean Foods’ recent efforts to reshape its manufacturing network and supply chain to give it some clout with retailers – and do that work away from the glare of the public markets.
“It’s very difficult to close on these plants seamlessly, because you always got temporarily elevated costs [and] you’ve got potential service disruptions. That’s the last thing you want to report as a public company,” Baumgartner says.
“I guess, theoretically, a buyer could look at it, acquire the debt or gain control in Chapter 11, restructure the business [and] maybe potentially get better economic economics with retailers. If they have to close more plants, they can go and do it as a private company, so you’re not in a public market focus, so you can strengthen up the business overall.”
Preben Mikkelsen, a Denmark-based dairy industry analyst with his own firm, PM Food & Dairy Consulting, says Dairy Farmers America’s aim could be to build its processing capability for consumer-facing products but cautioned: “It can be costly because Dean Foods is bleeding. It can be a risky business to take over Dean Foods.”
He adds: “It could be into a more market-oriented position where they get some of the brands from Dean Foods and they get some of the processing facilities and some of the market shares, especially in liquid milk. It’s a challenging business because the market is shrinking. It’s not a growth market they are entering. Their aim could be to get into more the milk they collect [and] sell it as raw milk or input to other dairy companies.”
On paper, there is the theoretical possibility there could be rival interest in buying Dean Foods. Saputo has, in recent years, often been linked with a move for the business, although the Canadian company’s CEO, Lino Saputo, told Bloomberg this summer such an acquisition would be “a volume play rather than a value play” with “more capacity than people drinking milk in the US”.
Could other major dairy players be monitoring the situation?
Mikkelsen says: “It’s going to be interesting and I would not be surprised if some of the large dairy companies like Saputo or Lactalis came up front and did something. They could be serious alternatives.”
BMO Capital Markets’ Sharma is less sure – and has a warning for Dean Foods’ shareholders. “We see little hope for equity holders as the Chapter 11 process unfolds,” Sharma says. “Dairy Farmers of America has little – or any – reason to make a competitive bid for Dean Foods’ assets given the absence of viable competitors. Borden, HP Hood, and Dean Foods’ other smaller competitors are unlikely to bid for – or need – all Dean Foods’ national manufacturing plants.”
Looking into next year, Dean Foods has forecast its first-half volumes will fall 3% in the first half of 2020 year-on-year, although Wells Fargo predicts a 5% decline. The next chapter in Dean Foods’ story will unlikely make for easy reading.