Healthy Enough for a Health Food Spinoff
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes a larger company includes one really appealing division and several less attractive divisions. It's tempting to invest in the company because of its growth division, but there's always the risk of its other divisions dragging down long term results. Investors considering Dean Foods (NYSE: DF) will soon get a reprieve from this dilemma, as Marshall Eckblad at the Wall Street Journal reports that Dean thinks it's in good enough financial shape to spin off WhiteWave.
Dean Foods had been considering this split for quite some time, but like many food companies, Dean Foods had a heavy debt burden. L. Joshua Sosland, at FoodBusinessNews.net, reported that in February 2011, Dean calculated that one of the companies would be carrying unmanageable debt after the split. WhiteWave was still improving its sales, so waiting for this division to become stronger in 2012 seemed like a good decision at the time. Right now, it looks like Dean Foods made the right choice in 2011, although with $130 million in cash and $3.91 billion in debt, Dean is still heavily leveraged.
When Roundy's (NYSE: RNDY) had its own IPO, investors also had to consider the grocer's growth brands and stable brands. Roundy's expected the Mariano's chain in Chicago to drive much of its future growth. An investor might have preferred investing in Mariano's by itself, but there were only a few Mariano's stores at that point, so a spinoff wouldn't have been realistic. Roundy's currently has a 9.5 percent dividend yield, while Dean Foods doesn't pay a dividend, but investing in WhiteWave instead of paying out dividends seems like it helped Dean Foods' investors more.
Dean realized that a natural food company's shares would probably fetch a huge premium at a 2011 IPO, and this trend seems even more likely in 2012. Annie's and Natural Grocers went public at sizable premiums, but they didn't sell off sharply after their IPOs like many social media stocks. Although several health food companies are very expensive right now, they don't have to worry about developing sustainable revenue models. The Wall Street Journal article estimates that WhiteWave's market cap after the IPO could be as high as $1.5 billion, depending on its popularity. Dean Foods itself was worth $2.3 billion after rising 27 percent after hours on Wednesday.
Dean currently owns one of the strongest soy milk brands on the market, Silk, which would belong to WhiteWave after the IPO. I've had Silk soymilk before and I like the product better than some of the other soymilk brands I've tried, and Silk shows up regularly at stores. There was a controversy over Silk soymilk in 2011 when Dean started using regular soybeans, some of which included GMOs, in its soymilk. In response, Dean stopped using GMO soybeans and arranged a deal with the Non-GMO Project to confirm that its soymilk was GMO free, reported Akhila Vijayaraghavan at Triple Pundit.
A high debt burden won't prevent a health food company's stock from selling at a premium if investors think it can earn enough to pay off its debt. Hain Celestial (NASDAQ: HAIN) has $41 million in cash and $431 million in debt, but still has a forward P/E of 26 because of the strong revenue and income growth it has been reporting. The news that WhiteWave helped Dean pay down lots of debt over the last year seems like good news for Hain Celestial investors.
Investors don't need to wait for the spinoff if they're bullish on WhiteWave, as Dean's performance Tuesday night showed. It could be cheaper to just buy Dean Foods, even after the rally, because a high valuation for WhiteWave doesn't leave much room for the value of Dean Foods' traditional dairy operations. Of course, this depends on the success of the WhiteWave IPO. If Dean Foods was fairly valued on Monday, a huge premium for WhiteWave at the IPO might not be justified, although Dean Foods did also report a profit this quarter instead of the loss it recorded last time. At this point, I'd wait to see what WhiteWave's balance sheet looks like before deciding whether to buy it.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Dean Foods Company and The Hain Celestial Group. Motley Fool newsletter services recommend The Hain Celestial Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
