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 Worth $20 to $23

I have been playing around with Dean Food’s (DF) valuation numbers in my head the last 3 days. My valuation range comes out to around $19.6/share to $23.04/share based on sum of parts valuation.

WhiteWave

WhiteWave (WWAV) is worth $2.5 billion or $13.50/share based on that fact that Dean holds 150 million Class B shares. Dean will use the $390 IPO million proceeds to pay down debt. That will be reflected in the lower interest expense in Fresh Dairy Direct Segment. Company has stated that it will distribute the shares “no earlier than 180 days following the closing of the IPO.” 

Morningstar

Morningstar is on the selling block. There was a Reuters report this past Thursday that there are multiple suitors for the company and the price tag is $1 billion to $1.5 billion. Let’s assume it gets sold for $1 billion in the worst case and $1.25 billion in the best case. In both cases, let’s assume Dean uses $500 million of the proceeds to pay off debt and the rest to distribute to shareholders. So, shareholders get $500 million or 2.70/share to $750 million or $4.05/share.

Fresh Dairy Direct

Fresh Dairy Direct Income

  • Operating Income will be over $400 million in 2012 even with higher commodity prices in 2012. They earned $226 million for the first half of 2012
  • Interest Expense. They will have $1.6 billion in debt. $1.13 billion of that will be senior notes and the rest of it will be the senior credit facility.
  • Corporate Expense includes things such as non cash share based expense. The company had $210 million corporate expense for the whole company in 2011. So, $150 million is a conservative estimate.
  • One time expenses includes such things as litigation expense, facility closing and reorganization costs that they seem to have every year.
  • Added $60 million to net income for FCF because they will have less capital expenditure compared to depreciation.

If Fresh Dairy Direct gets a multiple of 5 to 8 based time FCF, the value is $635 million to $1,016 million or $3.4 to $5.49.

Conclusion

 Adding all that up, I get a valuation range of $19.6 to $23.04. Obviously there are risks:

  • Whitewave share prices could go down. Right now the float is less than 25 million. Once the 150 million Class B Shares come into the market, there could be downward pressure on the price. Also, it is highly valued just like every other healthy food company. However, it does have the good growth.
  • Morningstar may not be sold or it may not distribute any of the proceeds if sold. However, there is considerable interest in the company based on the latest reports. The company has a history of increasing shareholder value. Besides the latest spin-off, the company in 2007 gave a $2 billion or $15/share dividend. Also, what else would they do with the proceeds? They will not pay off the senior credit facility fully. It does not make any financial sense. 
  • Fresh Dairy Direct is a low margin business and is dependent on commodity and fuel prices. However, the company is focused on cutting cost and lowering capital expenditures to increase FCF, and I have valued it conservatively. 
At the current price of $16.74 and my conservative valuation, Dean is severely undervalued. I would love to hear from everybody on this stock.

Disclosure: I am long Dean.

Dean Foods Spin-off

Dean Foods (DF) announced its WhiteWave-Alpro division has filed to spin-off into a separate company called WhiteWave. The IPO is expected to raise up to $320 million by selling 20 million Class A shares at about $14 to $16 each. Dean will still own 150 million Class B shares after the spin-off.

Dean is spinning-off WhiteWave to unlock the value of the company. WhiteWave has experienced strong growth over the last 5 years, but it has been hidden underneath Dean. WhiteWave makes Silk soy milk, Land O’Lakes and Horizon Organic.

I did a quick read of the filing, and it seems like Dean is undervalued even though it is up 13% today. 

I have initiated a position at $16.97, but will do more due diligence today and break down the analysis tomorrow.

Disclosure: I am long Dean Foods (DF)