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 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.

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.

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)