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Don't cry over spilled milk, but cheer for FREE milk!



October 26, 2012 – Comments (4) | RELATED TICKERS: DF

So I have been closely following Dean Foods' (DF) spin-off of its White Wave (WWAV) division.  It seems to me as though Mr. Market is practically giving away Dean's core milk business for free.  OK, it's not a great business, low margin and subject to the fluxuation in commodity prices, but still FOR FREE?

Check this out, I played with some quick and dirty numbers this morning:

"OK, here's some quick and dirty math about Dean Foods.

The company issued an IPO of 12% of its WhiteWave unit. This 12% stake is currently valued at 23 million shares x $17 per share or $391 million.

If X x .12 = $391, then the total value of WhiteWave according to the market is currently around $3.26 billion.

This makes the 88% portion of WhiteWave that Dean Foods retained worth approximately $2.87 billion.

Add to that the fact that the company raked in $391 million in cash from the offering and you have a total value of this transaction of $3.262 billion.

The total market cap for all of Dean Foods is only $2.95 billion, so if I have this straight Mr. Market values Dean's remaining operations at negative negative $312 million?

WhiteWave is taking the Horizon Organic Milk, Silk, Land O Lakes and International Delight brands with it. What does that leave DF with? Its Fresh Dairy Direct and Morningstar dairy product businesses and a ton of debt, but debt that is being paid down fairly rapidly.

Here's a description of the two remaining divisions:

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. Every day, we send out approximately 13,000 refrigerated trucks, tractors and trailers onto America's roads and highways to deliver our fresh products to more than 150,000 locations across the country.

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.

Dean has said previously that it is exploring the sale of its Morningstar Foord business. This Reuters piece estimates that Morningstar could fetch a billion dollars in a sale.

Dean Foods says exploring Morningstar sale

If this sale goes through, Dean's highest revenue, yet crummiest business Fresh Dairy Direct which is mainly involved in the distribution of milk would be left. Milk sales is low margin and fairly dependent upon the cost of commodities.

I'm still letting all of this swirl around in my head, but it looks like DF is undervalued at the moment to me."

As I said, these are very, very rough numbers, but that's how I like it.  I'd rather be approximately right than exactly wrong.  If I plan to establish a significant real money position in DF I'll do some serious crunching first.  This back of the envelope stuff definitely gives me the impression that Dean is dirt cheap.

The great new blog Hype Zero ( )  has a more refined analysis of the situation on its site:

" Dean valuation – Post Spin-offby amitd

I have gotten a lot of emails about the big Dean Foods (DF) drop. Here is my valuation:

Value from WhiteWave(WWAV) IPO: $2.95 Billion ($390 million from IPO proceeds + 150 million shares@17) 

So rest of Dean is essentially free at the current price of around $16 and change. 

Take into account:

Morningstar sale will be soon for $1 to $1.5 billion based on yesterday's reports. Fresh Dairy Direct Segment is the most profitable. Although, they will not get a high multiple.They have $2.5 billion in debt. Debt is made of senior notes and senior credit facility. The credit facility is currently charging less than 3% interest. Senior notes yields are higher, but mature I believe in 2016 and 2018.

My hope is that they don't pay off the senior credit facility with IPO proceeds because of the low interest expense and if they sell the Morningstar at the range that people are talking about and give back everything to shareholders, this stock is easily worth middle $20s.

I have been buying all the way down to sub $16. My average price should be in the $17.5 range.

I don't get the price drop today. So let's see..."

This is a very interesting situation to follow.  I am very intrigued by the current pricing of Dean Foods.  It seems like a gift to me. 

Does anyone else out there have any thoughts on the situation?  I'd love to hear them.

Thanks for reading and have a great day!


4 Comments – Post Your Own

#1) On October 26, 2012 at 3:39 PM, constructive (99.96) wrote:

WWAV originally had a price midpoint of $15, IPOed at $19, now back to $16.80. Lesson: if the offering price changes, pay attention to the original price because it's probably headed back in that direction.

At the current price WWAV trades at 33x trailing earnings. Clearly if you buy DF, you should at least look at shorting out WWAV.

Stifel's downgrade of DF and the big selloff today really seems quite dumb.

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#2) On October 26, 2012 at 3:45 PM, constructive (99.96) wrote:

The price drop could be because people have lockups on WWAV or can't get a borrow, so they sell or short DF instead.

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#3) On October 26, 2012 at 4:15 PM, constructive (99.96) wrote:

If you like this, you might like EMC as well. Not as cheap but EMC and VMW are much better businesses than DF and WWAV. I think if you back VMWare and excess cash out of EMC, the stub trades for less than 10x earnings.

Or how about Porsche's stake in Volkswagen? More leveraged but similarly cheap I think.

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#4) On October 26, 2012 at 9:36 PM, ChrisGraley (28.49) wrote:

Wow! I'm really scratching my head trying to figure this one out. My initial instinct is a bit of IPO euphoria, but your points are valid.

Megashorts points make sense too.


Thanks for giing me something to look at over over what would have been an otherwise boring weekend. 

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