No Need to Surf This Wave

By Joel Eggerding - October 31, 2012 | Tickers: DF, WWAV | 0 Comments

• Email
• Print

As individual investors, we have advantages over professional money managers.  Buying and flipping IPOs should be left to the professionals, but there is a way we can profit.  I like to look at IPOs as there are regulatory filings and press coverage. If I like the IPO then I will put it on my wishlist and look to buy in 6-9 months when the professionals are on to the new IPOs.

The White Wave Foods Company (NYSE: WWAV) priced their shares at $17 on Thursday night.  The stock opened on Friday at $19, but closed at $16.75.  That means everyone who bought at the IPO and did not sell in the first hour is losing money on the stock.  This is an advantage to an individual investor since a losing IPO should continue to go down as the IPO buyers flip their shares leaving us an opportunity to buy later at a lower price.

So, on Saturday, I pored over their website and SEC filings. White Wave is not a true Initial Public Offering.  Rather it is a split-off of Dean Foods (NYSE: DF).  Split-offs are still a great way to make money since the parent company is freeing off a subsidiary so they can be focused on their core strengths. White Wave has three product lines with well known brand names:

• Plant Based foods and Beverages (41% sales)-- Silk Soymilk
• Premium Dairy (25% sales) -- Horizon Organic
• Coffee Creamers and Beverages (34% sales) -- International Delight and Land O' Lakes

I think it was odd to include coffee creamers with the more obvious health/organic lines of business, but there could be synergies in the production of the creamers so I was willing to overlook this issue to get more exposure to the Organic/health foods market as I have a profitable position in market leader Hain Celestials. However, in the end I found 3 red flags for White Wave and will not be looking to add it to my wishlist.

Red Flag #1 -- Capital/Voting Structure

While the company raised $391 million through the IPO, they previously borrowed $1.15 billion from Dean Foods which needs to be paid back in the next couple of years.  To pay off this debt, the company in their SEC filing discloses:

"Upon completion [of the IPO] WWAV will enter into new senior secured facilities between $800 and $925 million"

So, White Wave has to take all the proceeds from the IPO and borrow more money to pay off Dean Foods.  While I know this can be normal in split-offs, this tells me that the purpose of the IPO was to help Dean Foods and not set-up White Wave for the future

At the completion of the IPO (without any over-allotments), Dean foods will own 86.7% of White Wave, but will retain 98.5% of the voting power.  This is great for Dean Foods since they can continue to control the company through super voting rights, but would not be in my best interest as a potential WWAV shareholder.  I expect Dean Foods will eventually reduce their non-voting stake via future sales or a spin-off of shares, both of which would depress WWAV stock.

Red Flag #2 -- Growth by Acquisition

 4 of their largest brands were built through acquisition. 

• International Delight in 2007
• Silk in 2002
• Horizon Organic in 2004
• Alpro (their plant based brand in Europe)  in 2009

In their SEC disclosure White Wave gives a glimpse of their future growth through acquisitions. 

"[WWAV] intends to continue to grow business in part through the acquisition of new brands and the establishment of joint-ventures in the US, in Europe and Globally."

This concerns me as future acquisitions means that White Wave would have to spend their cash, issue debt or stock, causing the stock to go down. As a shareholder I would prefer to see them grow rather than buy brands. For example, they bought the Alpro line to enter Europe, why didn't they take the Silk brand to Europe?  Now they have similar products with different brand names.  

Red Flag #3 -- Reliance on Wal-Mart

White Wave is increasing its reliance on Wal-Mart.  In 2011, 17.8% of their sales went to Wal-Mart/Sams and through June 30, 2012, this is up to 18.3%.  What would happen if Wal-mart replaces their brands with a compeitor, or offers a new house brand at a cheaper price point.  A major change to their relationship with Wal-Mart would be detrimental to White Wave shareholders.

Final Thoughts

I really wanted to like this company as they are a global company in a growing market segment.  Instead I see a stock that has three ways to under-perform the market.  As individual investors we can leave this stock to the mutual funds and ETFs that have to hold food stocks in relation to the index they are tracking. I do not see a need to surf this wave, but will instead keep looking to the next wave of IPOs.

• Email
• Print
• Feedback