Fitch has placed its `A’ senior unsecured notes rating and its commercial paper `F1′ rating of Dean Foods Company’s (Dean) on Rating Watch Negative, following the company’s announcement of a definitive agreement to acquire Land O’ Lakes Upper Midwest fluid milk operations. Fitch’s rating actions reflect the recent increase in leverage due to debt financed share repurchases and the anticipated debt financed acquisition of Land O’ Lakes dairy operations. Approximately $770 million of debt is impacted by this rating action. Resolution of the Rating Watch is expected as soon as Fitch meets with the company’s new senior financial management team and assesses the company’s long-term operational and financial strategy.
The Land O’ Lakes dairy operations to be acquired by Dean Foods includes the fluid milk operations, as well as a new extended- shelf-life dairy and cultured plant. In a separate agreement, Dean Foods will also enter into a joint venture with Land O’ Lakes to produce and market creams, half-and-half, sour creams and extended shelf life products. In addition to providing Dean with an entrance into a new geographic territory, more importantly, the acquisition provides the company with another brand to leverage throughout its territories. The acquired operations generate sales of approximately $310 million.
The U.S. milk industry is mature and consolidating, and Dean, along with the other industry leader, are aggressively acquiring dairies. Through cost control measures such as shutting down high-cost facilities, increasing the production of underutilized facilities and leveraging its procurement capabilities, Dean Foods has been able to increase the margins of its acquisitions. However, operating earnings and cash flow during the latter part of fiscal year 1999 and the first quarter of fiscal year 2000 were negatively impacted by higher-than-anticipated integration costs associated with the company’s aggressive acquisition activity during 1998.
For the first nine months of fiscal 1999, ended Feb. 27, 2000, the company’s EBDITA-to-interest was 6.8 times and its total debt-to-EBDITA was 2.3 times. On a pro forma basis, EBDITA-to- interest was 5.5 times and debt-to-EBDITA was 2.9 times.
In a highly fragmented and competitive market, Dean Foods is one of the largest producers of dairy products and the leading processor of milk in the United States. The company is also one of the largest pickle producers and marketers in the United States, with sales nationwide. Dean Foods’ other dairy products include ice cream, frozen yogurts and novelty products made with ice cream and sherbet. The company also produces cultured dairy products, which include cottage cheese, yogurt and sour cream. Other products in the company’s pickle segment include specialty sauces such as shrimp, seafood, tartar, horseradish, chili, and sweet and sour sauces. Dean Foods’ specialty segment includes non-dairy coffee creamers and aseptic products such as ready-to- serve natural cheese sauces, puddings and other specialty sauces. Approximately 50-55 percent of the company’s products are sold as private labels. In fiscal year 1999, dairy products accounted for 79 percent of revenues and 50 percent of operating income, pickles 10 percent and 21 percent, and specialty product 11 percent and 29 percent, respectively.