Dean Foods Explores 'Strategic Alternatives,' Including Sale
Feb. 27, 2019
Dean Foods is exploring "strategic alternatives to enhance shareholder value," according to a release. The options include an outright sale, pursuing a joint venture or merger, shedding assets or continuing on the company's current business plan by focusing on strategic initiatives.
The company has not yet set a timeline for the review of these options, but Evercore Group LLC will serve as financial advisor to Dean. CEO Ralph Scozzafava said in a statement that Dean is "taking vital, transformative actions to maximize the benefits of our scale and position the company for the long term."
Dean — which owns more than 50 dairy brands, private labels and legacy products including Oak Farms and Lehigh Valley Dairy Farm — reported a net income loss of $260.1 million in fourth quarter earnings Wednesday.
The announcement of this potential sale came the evening before Dean Foods reported its quarterly earnings. The country's largest milk producer posted losses for the fourth consecutive quarter and suspended dividends. For the full year, Dean reported a net loss of $3.63 per share. Announcing a review of its options before the release of this poor earnings report makes sense. And given the company's recent issues in the category, it shouldn't come as surprising news.
Amid the increase in options and consumer interest in plant-based milks and other dairy alternatives, Dean Foods has struggled. Plant-based and even lab-created milk has been sweeping the industry, hurting farms and milk producers. U.S. non-dairy milk sales were up 61% over the past five years, while dairy milk sales plunged 15% from 2012 to 2017, according to Mintel.
Adjusting to the change in demand, Dean has been working to diversify its investments in waters, juices and plant-based products. Dean bought a minority stake in Good Karma Foods, which sells non-dairy milk and yogurt, and later announced it was taking majority stake in the company. The dairy manufacturer also purchased Uncle Matt's Organic, a maker of probiotic-infused juices and fruit-infused waters. In 2016, it expanded its reach into other dairy segments, buying the manufacturing and retail ice cream business of Friendly's Ice Cream, a Northeast-U.S. restaurant.
In previous years, the company divested some of its plant-based and organic lines, including WhiteWave Foods and Morningstar.
The moves to diversify Dean's portfolio haven't been enough to avoid plant closures and layoffs. Late last year, Dean Foods closed two milk processing facilities and laid off 207 workers. Earlier in the year, the company shuttered three facilities. Dean also terminated more than 100 dairy contracts with the company to curtail how much milk it was purchasing.
Despite these measures, Dean Foods' earnings have continued to disappoint. Last quarter, profits dropped 12% from the same time a year ago. But that decline hasn't just been a result of plant-based competition. The company has battled with an oversupply of milk and tariffs. Since 2014, dairy prices have been falling consistently. Private label brands have also hurt Dean's business, as stores like Walmart and Amazon have launched store-branded milk that bring even more competition to the crowded space.
It seems that the company's cost-cutting measures haven't been enough and an outright sale could be likely. However, it's unclear who will want to buy Dean Foods. JPMorgan analyst Ken Goldman predicted that there won't be many interested buyers, according to Seeking Alpha.
"If Dean Foods does happen to find a buyer (unlikely, in our view), the stock will probably be purchased at a discount to the current price," Goldman said. "Dean is a levered company with a fast-deteriorating business and numerous out-of-date production facilities."