Dean distributing WhiteWave Shares

Dean Foods (DF) will distribute an “aggregate of 47,686,000 shares of WhiteWave Class A common stock and 67,914,000 shares of WhiteWave Class B (WWAV) common stock on May 23, 2013, the distribution date, as a pro rata dividend on shares of Dean Foods common stock outstanding at the close of business on the record date of May 17, 2013.”

Based on the number of shares outstanding on March 31, “Dean Foods common stock will receive approximately 0.256 shares of WhiteWave Class A common stock and approximately 0.364 shares of WhiteWave Class B common stock in the distribution.”

Based on today’s price of WWAV, that is a distribution of almost $11/share. Dean will keep  34,400,000 shares of WWAV after the distribution, which are worth about $600+ million or $3.2+ based on todays price. However, “Dean Foods expects to dispose of its retained shares of WhiteWave Class A common stock within 18 months of the distribution in one or more debt-for-equity exchanges or other tax-free dispositions.” So, most likely investors are not going to see any dividends from the rest of kept shares.

Invest in WWAV or Dean?

I would continue to stay away from both Dean and WWAV. When I originally wrote Dean being undervalued, I was mistaken about 2 things:

  • Dean was going to distribute all of WWAV shares. If they had distributed all the shares, the stub (what was left over would’ve been pretty cheap).
  • Some of the Morningstar sale proceeds would be distributed to shareholders.

I would assume that WWAV shares would go down initially after the distribution as the new shares flood the market. However, there are two events that might make the shares go higher:

  • Earnings report on May 9th.
  • Rumors about takeover speculation.

Here is the news release on the distribution.

Disclosure: I do not own shares of DF or WWAV

Dean Foods Upgraded at Goldman

Dean Foods (DF) got upgraded at Goldman Sachs today and increased the price target from $20 to $22. 

“We view DF as a compelling sum-of-the-parts story as: (1) we expect a full spin-off of WhiteWave around mid-year 2013 and DF currently owns 87% of WWAV; (2) we see potential for further upside to value if management is able to consummate its intended sale of Morningstar; and (3) we expect DF’s remaining Fresh Dairy Direct (FDD) business to re-rate higher on stabilization of raw milk prices, improved balance sheet and healthy cash generation profile.”

The stock is up about $.60 to $17.20 on the news.

I continue to hold Dean Foods and agree with Goldman on valuation. Read my full analysis on Dean Foods here.

Disclosure: I am long Dean.

Dean, Susser, CommonWealth, News Corp

Dean Foods

Dean Foods (DF) earnings are coming out tomorrow. The hope is that they disclose the potential sale of Morningstar in the report. The stock has been slowly going down. I still think it is undervalued. 

Interestingly, there is support on the stock today as a Barrons article came out with a favorable article. Their argument looks very similar to mine. Basically, it is undervalued if you factor out WhiteWave. Check out the article here.

Here is my valuation of Dean. The only difference is that I feel Dean will not use the full proceeds from the Morningstar sale to pay off debt. 

Susser Holdings

Susser Holdings Corporation (SUSS) came out with earnings that beat expectations. The market obviously likes the results and forward guidance.  The shares up more than a dollar on a down day. Read the earnings here.

I continue to hold a small position in the company with a target price around $47. I think the spin-off of Susser Petroleum Partners LP (SUSP) will accelerate the growth over the coming years. However, it is a volatile business so i am keeping limited exposure. 

My article on Susser is here.

Commonwealth REIT

Commonwealth REIT (CWH) came out earnings that beat expectations. The shares are down a little today. 

The company is very undervalued, but I do not trust management. I have been very critical about management and wrote a scathing piece on SeekingAlpha about the need to switch management. 

I have been in touch with smaller investors as well as bigger firms that hold millions of shares about possibly doing something to increase shareholder value. If you are a shareholder get in touch with me personally. 

I participated in this mornings conference call hoping to ask a question or two. However, I never got the opportunity. Anyway, I suggest investors read the call transcript as it was very funny. Lots of frustrated investors. I will post a link on the comments once it is up. 

The best way to play CommonWealth is buying long term call options. Read the article here.

News Corporation

News Corp (NWSA), one of the stock picks of HypeZero10, came out with earnings that beat expectations and is up today. News Corp is top holding of Donald Yacktman. His firm holds 80,556,339 share of the company as of September 30, 2012. He did reduce his position by 300,000 from June 30. 2012.

It is spinning-off its publishing unit and buying back shares. Here is the info about the spin-off:

On June 28, 2012, News Corporation announced that it intends to pursue the separation of its publishing and its media and entertainment businesses into two distinct publicly traded companies. The global publishing company that would be created through the proposed transaction would consist of the Company’s publishing businesses, its education division and other Australian assets. The global media and entertainment company would consist of the Company’s cable and television assets, filmed entertainment, and direct satellite broadcasting businesses. Following the separation, each company would maintain two classes of common stock: Class A Common and Class B Common Voting Shares. The separation is expected to be completed in approximately one year from the date of announcement. In addition to final approval from the Board of Directors and stockholder approval, the completion of the separation will be subject to receipt of regulatory approvals, opinions from tax counsel and favorable rulings from certain tax jurisdictions regarding the tax-free nature of the transaction to the Company and to its stockholders, further due diligence as appropriate, and the filing and effectiveness of appropriate filings with the SEC. There can be no assurances given that the separation of the Company’s businesses as described will occur.

Here are the quarterly results

Disclosure: I am long DF, SUSS, CWH. I do not own NWSA.

Whitewave Spin-off Prices at $17

WhiteWave (WWAV), the spin-off of Dean Foods (DF), based on strong investor interest increased the size, from 20 million share to 23 million shares, and price, from $14-$16/share to $17/share of their IPO.

At $17/share, the company is worth about $2.9 billion. Given that Dean is worth $3.5 billion, there should be a pop in Dean’s shares tomorrow. 

When the initial pricing was announced, I wrote that Dean was undervalued and urged investors to buy. I initiated a position at $16.96. Read the article here.

WhiteWave starts trading tomorrow. 

Disclosure: I am long Dean. 

Sears, Genie, and IPOs

Lot of upcoming events and most of them are this week…

Sears

Sears (SHLD) , which owns 95.5% of Sears Canada, will distribute about 44.5% of its interest to its shareholders. The distribution will be made on November 13 to shareholders of record on November 1. For every one share of Sears, investors will receive 0.4283 share of Sears Canada. The current price of Sears Canada is $11. So, investors will receive almost $5/share in distribution. After the distribution, Sears will still maintain 51% ownership in Sears Canada.

Read article on Sears here.

Genie

Genie (GNE) Preferred will start trading tomorrow, Wednesday, October 24th on the NYSE under the symbol GNEPRA. Only 1,604,591 (7.5% of outstanding Class B) shares were validly tendered. It should be interesting to see how these trade.

Read article on Genie here.

Dean, Lehigh

Dean (DF) spin-off, WhiteWave (WWAV) will begin trading this Friday, October 26th. I expect it to price at the high range just because of the interest in the healthy food segment and low float.

Read our full analysis on Dean here

Lehigh Gas Partners LP (LGP) will also start trading this Friday, October 26th.  

Read our full analysis on Lehigh here.

Disclosure: I am long DF.

Buy Dean Foods

Dean Foods LogoAs I mentioned yesterday, Dean Foods (DF) shot up 13% on the announced terms of its spin-off of WhiteWave Foods (WWAV). Based on the initial pricing for the IPO, Dean is still undervalued. 

 

Business

Dean operates three separate business segments:

  • “Fresh Dairy Direct is one of the nation’s largest processors and direct-to-store distributors of fluid milk marketed under more than 50 local and regional dairy brands and private labels. Fresh Dairy Direct also distributes ice cream, cultured products, juices, teas, bottled water and other products.”
  • “Morningstar Foods is a leading warehouse delivery dairy business that produces and sells traditional and specialty items, including cultured dairy products, ice cream mixes, coffee creamers, aerosol whipped toppings, traditional and value-added milks, and blended iced beverages to retailers and foodservice providers nationwide.”
  • WhiteWave-Alpro develops, manufactures, markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic milk and other dairy products, International Delight coffee creamers and LAND O LAKES creamers and fluid dairy products, and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alproand Provamel brands.”

Spin-off

Dean is spinning-off its fastest growing unit, WhiteWave. It is expected to raise up to $320 million by selling 20 million Class A shares at about $14 to $16 each. The underwriters also have an option to purchase up to an additional 3 million Class A shares after the spin-off. Dean will still own 150 million Class B shares after the spin-off. The expected pricing date is October 25th.

Class A and Class B are exactly the same except:

  • Class A has 1 vote per share. Class B has 10 vote per share.
  • Class B also can or will be converted into Class A shares under certain circumstances.

After the spin-off, Dean will control WhiteWave because of its majority ownership and the fact it owns all the Class B shares.

Valuation

The value case for Dean Foods is pretty simple. The market capitalization for all of Dean is $3.13 billion. Based on the price range of $14 to $16 for WhiteWave, the range for its valuation is $2.38 billion to $2.72 billion.  That means the rest of Dean is worth between $410 million to $750 million.

Even though the rest of Dean is having trouble growing revenue and maintaing margins, it still makes over 50% of net income. Dean’s 2012 net income will be around $200 million. If we allocate allocate around $95 million of it to WhiteWave, the rest of Dean will make up the other $105 million. After the spin-off, the rest of Dean would be worth at a P/E of 3.9 to 7.1. 

WhiteWave

WhiteWave has been growing thanks to its brands and its focus on healthy foods such as organic milk and plant based milks. Consumers are moving towards a healthier lifestyle and that includes healthy foods.

Revenue for 9 months in 2012 increased 13% from $1.45 billion to $1.65 billion. Operating income has grown at more than 17% from $132 million to $155 million.

The company had pro forma earnings of $.49/share in 2011. If WhiteWave’s earns around $.57 for 2012, it will trade with a P/E range of 24 to 28 based on the IPO price range. 

Although, I would be hesitant to invest in WhiteWave at this type of valuation, it is somewhat in line with other health food competitors such as Hain Celestial Group, Inc. (HAIN), which trades at 25 times June 2013 earnings. It should be noted that Hain has a higher revenue and income growth rate, but their fiscal year ends in June 2013 where WhiteWave’s ends in December 2012. 

Rest of Dean

I went back and worth between valuing the rest of Dean separately or together. Initially, I valued it separately, but it became too complex because:

  • After the spin-off, Dean will have about $2.5 billion in debt. Assigning different amount of debt to each company has an impact on the valuation.
  • Dean does report operating income for each of the segments, but it has “Corporate and Other Expenses” of around $200 million for the whole company. Assigning different amount of expenses to each company has an impact on the valuation.

So, instead I’m going to make it real simple. As aforementioned, the rest of the company should have over $105 million in net income in 2012 if you back out WhiteWale. However the net income does not take into account:

  • Increasing free cash flow for rest of Dean. In 2012, the rest of Dean is decreasing capital expenditure. Based on management’s 2012 projections their depreciation expense will exceed their capital expenditure by $60 million. That’s $60 million extra in cash.
  • Private sale of Morningstar. In late September, the company was put up for sale by Dean to increase shareholder value. A lot of analysts said that it could fetch $1 billion in a private sale. Morningstar’s business is better than Fresh Dairy Direct’s because customers are less likely to switch from a branded coffee creamer as opposed to a branded milk. However, the market is mature and it is still highly dependent on the cost of raw milk and bulk cream. So, a $1 billion price is hard to fathom. It will have $120 million in operating earnings in 2012. If you factor in some interest expense, taxes and other expenses, net income would probably drop down to $70 million. I could see it going for 12 times that or $840 million. Private equity would still have room to load it with debt and flip it for a profit.
  • Although Fresh Dairy Direct makes up a majority of revenue (over 70%) and is a declining business, it is still profitable (over $400 million in operating earnings expected in 2012) and management is focused on cutting cost to increase profitability. 
Conservatively the rest of Dean’s free cash flow will exceed $150 million in 2012. 8 to 10 times that amount gives a valuation of $1.2 to $1.5 billion.
 
Conclusion
 
So, that gives us a valuation range of $3.58 billion to $4.22 billion or $20/share to $23/share. Of course, the final pricing and even post IPO pricing of WhiteWave has a huge effect on the valuation, but currently it is undervalued.
 
I should note one thing I am scared about is the Fresh Dairy Direct business, but the fact that management is focused on increasing shareholder value gives me some reassurance.
 
Nice to have the stock up $1 from when I recommended it yesterday!
 
Disclosure: I am long DF.