The news this week that Dean Foods has sold its customer-brand yoghurt busines in the US comes as little surprise, given the turbulent year the country’s largest dairy processor has just experienced – and its decision to re-shape its business.
Throughout 2010, Dean Foods warned repeatedly of tough trading conditions in its core fluid milk business due to pressure from private label. In both the firm’s second- and third-quarter results, profits were hit by competition from own label affecting its fluid milk business, while the dairy giant was also battling volatile commodity costs.
CEO Gregg Engles insisted in November that the firm was taking “aggressive steps” towards improving results, including accelerating cost reductions and realigning the company’s management and organisational structure.
In July, the firm had already sold its UK organic business Rachel’s to France’s Lactalis. Four months later, General Mills acquired Dean Foods’ Mountain High Yoghurt business and brand for an undisclosed sum.
However, some analysts have been concerned that Dean Foods may be at risk of tripping its debt covenants in the second quarter of 2011.
Last month, the Alpro-owner announced plans to offer US$400m in senior notes to institutional buyers. The proceeds from the move will be used to pay down a portion of a loan under Dean’s credit facility.
Analysts have consistently argued that Dean Foods may have to sell more assets to help pay down the debt, and this indeed appears to be what the firm is now doing.
On Monday (10 January) Dean Foods disposed of its customer-brand yoghurt business to Schreiber Foods.
Financial details were not disclosed, but the sale included production facilities in California and Wisconsin, as well as yoghurt production assets from Dean Foods’ facility in New York state.
Robert Byrne, director of industry and regulatory affairs for Schreiber, told just-food that the acquisition will expand the firm’s “rapidly-growing yoghurt business”. For Dean Foods, the sale will no doubt allow it to ease the pressure on its debts.
“Dean Foods does seem to have been pruning smaller, and presumably lower-margin businesses around the edge of its portfolio in recent months,” Sanford Bernstein analyst Alexia Howard told just-food. “I do think they are using the proceeds [from the deal with Schreiber] to pay down debt in the hope that they can avoid tripping the new covenants established in December.”
However, there is speculation that Dean Foods’ WhiteWave-Alpro division and its ice-cream business could be next on the chopping block.
Questions have continued to be raised, for instance, over whether an activist investor could call for Dean Foods to sell part or all of WhiteWave-Alpro to pay down debt.
Howard said this was plausible following the poor set of results in the third quarter that saw profits almost halve. CEO Engles has refused to be drawn on whether a spin off of WhiteWave-Alpro is possible but Howard believes some of the business could be sold should an active investor become involved in the debate over the future direction of Dean Foods.
“At this point I think it unlikely that they will get rid of larger businesses with decent growth trajectories and margins like Alpro,” Howard told just-food. “Although it is vaguely plausible that if an activist were to emerge over the next month (the window for proxy filings ahead of the annual shareholders meeting in May is from 19 January to 18 February), we could see a call to sell off most of WhiteWave as a chunk to fix the debt predicament once and for all.
And that investor could come in the shape of billionaire investor David Tepper. The founder of Appaloosa purchased a 7.35% stake in Dean Foods last week.
A filing with the New York Stock Exchange on Friday (7 January) showed Appaloosa Management held 13.4m shares in the company as of 28 December. Dean Foods shares rose more than 11% on news of the purchase Friday to reach US$9.89.
Nonetheless, Howard remains positive about the year ahead for Dean Foods, given it has undertaken another round of refinancing and reconfirmed guidance for the fourth quarter of 2010
“On balance, I’m inclined to be a bit more positive on the stock,” she tells just-food. “I’m also hearing that retailers are no longer playing suppliers against each other, which could mean a better performance from the second quarter onwards. But I think this sale of non-core businesses is an attempt by the management team to stave off the need for more dramatic portfolio moves.”