Breaking Up Is Not Hard To Do

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Whoever said breaking up is hard to do was not thinking of corporate spin-offs. Since declaring a spin-off of its premium organic and soy division in August, shares of Dallas, Texas-based food and beverage company Dean Foods (NYSE: DF) have rallied more than 30 percent.

WhiteWave Foods (NYSE: WWAV), the former Dean Foods segment, began trading as its own entity in late October in an initial public offering of nearly $400 million. According to a recent article in Barron's, Dean Foods, which continues to hold a majority stake in White Wave, still has more room to climb.

Dean Foods still intends to spin-off the remainder of its equity stake in WhiteWave in a tax-free transaction over the next six months, according to a recent 8-K filing

The company started down this path in late 2011, when it revealed it would separate its business into three distinct segments:  Dairy Direct, WhiteWave Alpro (which, according to the Dean Foods website, consists of the WhiteWave Foods Company's operations), and Morningstar in its attempt to focus on spending capital and investing in "value added segments" of the company, according to the SEC filing. In addition, the restructuring also involved changes to the executive lineup.

Gregg Tanner, a former executive at The Hershey Company who joined Dean Foods in 2007, took the helm of Dean Foods following the WhiteWave spin off, will earn a base salary of $1 million with certain incentives, including a short-term incentive target worth 130 percent of the base salary and a long-term incentive target worth $3.7 million.

Breaking It Down

In the first half of 2012, WhiteWave accounted for 18 percent of Dean Foods' consolidated net sales. Its Morningstar brand, which is behind such products as Friendship sour cream, represented 11 percent of sales in the same period, a period during which Dean Foods closed one Morningstar facility. In September, Dean Foods announced that Morningstar was on the block. Fresh Dairy Direct, Dean Foods' primary brand, accounted for more than 70 percent of sales in the first half of 2012.

Earlier this year, Dean Foods revealed a corporate overhaul, one that not only led to the eventual spin-off of WhiteWave and hopeful sale of Morningstar, but that is also focused on slashing debt, and generating higher returns more quickly, according to a 10-K filing.

Despite the high-margin nature of the soy and organic label market, Dean Foods was led to divest of the business segment amid greater pressure in its core milk business stemming from higher costs and an increasingly threatened market share, according to Barron's. The focus on its core business appears to be paying off.

In addition to cutting its debt, Dean Foods is also growing market share, according to Deutsche Bank analyst Eric Katzman (cited in Barron's.) He expects the stock to trade at a premium to other commodity plays, and also projects that the company may begin paying a dividend with a 5 percent yield given its cost-cutting initiatives, recent proceeds from the WhiteWave spin-off and its $60 million in cash flow.

Last month, Dean Foods' competitor Smart Balance (NASDAQ: BDBD) revealed a reorganization of its own, one that involves relocating its corporate headquarters from New Jersey to Colorado and also re-branding itself under the name "Boulder Brands." As part of that restructuring, Smart Balance will split into two business segments -- Smart Balance, consisting of products such as butter and milk, and Natural, which is tied to its recent acquisition of Udi's. Shares of Smart Balance have more than doubled year-to-date and are currently trading at just under $13 per share. 

Spin-offs are reason to celebrate because they underscore a company's efforts to focus on its core business and strategy for one reason or another. In the case of Dean Foods, there does seem to be an opportunity to participate both in future capital gains and a potential future dividend distribution while the amicable split from WhiteWave could serve the specialty dairy company equally as well.


GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Dean Foods Company. Motley Fool newsletter services recommend Smart Balance. 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.

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