Is Dole Food's Offer Cheap?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dole Food (NYSE: DOLE) has recently received a buyout offer from its 90-year-old chairman and CEO, billionaire David Murdock. He would like to acquire around 60% of the company at around $12 per share in cash, valuing Dole Food at around $1.5 billion in enterprise value. The offer came in at around 18% premium to its pre-offer trading price. Interestingly, Dole Food’s share price has moved above Murdock’s offer, to nearly $12.50 per share. Is $12 per share fair for Dole Food? Let’s find out.

Divesting the packaged foods business to Itochu

Dole Food has a history dated back to 1851, and since then has become the leader in producing and distributing fresh vegetables and fresh fruit. Recently, Dole Food has restructured its business by divesting its packaged-foods business to Itochu for around $1.7 billion. After the deal, the company expects to have a lower net debt/adjusted 2013 EBITDA at around 2.5, a much stronger balance sheet position. The debt reduction will save Dole Food a lot of interest expense payment. The adjusted 2013 EBITDA expected to come in at around $150 million to $170 million. Moreover, the company is trying to sell around 20,600 acres of land in Hawaii where it has no farming activities, with the total expected value of $175-$200 million.

Announced repurchase plan then suspended it

A month after Dole Food completed the divestment, it announced that it would repurchase up to $200 million of the company’s shares. COO Michael Carter was bullish about the share repurchase program, he said,

Our new capital structure was designed and implemented to provide needed flexibility to enhance shareholder value, as well as to meet future competitive challenges as we continue to launch the new Dole. We believe the share repurchase program will enhance shareholder value.

However, at the end of May, Dole Food suspended its share repurchase program. The company mentioned that it needs around $165 million to acquire three newly built refrigerated container ships for its operation in the West Coast. Right after the share buyback suspension announcement, Dole Food dropped by 6%.

At $12 per share, Dole Food is valued at around 10.2 times its forward EBITDA. EBITDA multiple represents the ratio of Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It takes into account the relationship of the market value, cash and debt level, compared to the firm’s cash flow position.

Its peers are much more cheaply valued

Compared to its peers Chiquita Brands International (NYSE: CQB) and Fresh Del Monte Produce (NYSE: FDP), Dole Food is the most expensively valued on the market. Chiquita Brands, at around $10.90 per share, is worth around $507.3 million on the market. The market values Chiquita Brands at around 7 times its forward EBITDA. Chiquita has been in the business restructuring process under its new CEO Edward Lonergan. He has been trying to lower the cost with the target margin of around 4% for the bananas segment and 7%-8% for the salads segment. Chiquita pointed out several opportunities to drive 2013 operating performance, including banana contracts to increase U.S. market share growth and Midwest salad facilities consolidation to reduce the operating costs. Chiquita Brands’ EBITDA might reach $175 million--nearly 3 times higher than the EBITDA of $59 million last year.

Fresh Del Monte Produce is trading at nearly $27 per share, with a total market cap of around $1.55 billion. The market values Fresh Del Monte at only 7.8 times its forward EBITDA. It focuses on the fresh-cut produce business in many regions around the world, including the Middle East, Europe and Africa. In the first quarter 2013, Fresh Del Monte experienced a 2.33% growth in revenue to $919 million. EPS came in at only $0.71, lower than the EPS of $1.08 in the first quarter last year. The lower earnings in the first quarter this year was due to a much higher cost of goods sold and higher provision for income taxes. Nevertheless, I personally think that the healthy eating habits will make consumers buy more fresh fruit products, affecting the company positively in the near future. In the beginning of May 2013, the company approved a 3 year share buyback plan for a total of around $150 million.

My Foolish take

Dole Food’s market price has moved up above the offering price of its Chairman and CEO David Murdock, indicating the fact that market might consider the offer to be undervalued. As both of its peers, Fresh Del Monte and Chiquita Brands are valued at a much lower valuation, they could be considered quite relatively undervalued and could be seen as good investment opportunities for long-term investors.

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