Monkey Business in the Banana Fields

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Dole Food Company (NYSE: DOLE) has been producing, marketing and distributing fresh vegetables and fruits to Americans for over a century. With a core focus on bananas and pineapples, it also markets packaged fruit, salads and freshly packed vegetables. Shareholders of the company went bananas when they came to learn that its own CEO David Murdock had made an offer to purchase the entire company. A point to note is that Mr. Murdock currently owns around 39.5% of Dole, and he valued his company at approximately at $1.1 billion.

What Is He Trying to Sell to Common Stockholders?

Stock of the company was trading at $10.20 on June 10, the day the offer was made. However, market pushed the price to $12.29 the next day after Mr. Murdock made the offer to purchase the remaining 60.5% of the company at $12 per share.

In the proposal to Dole’s board of directors, the current CEO tried to provide enough numbers to support his claims that this transaction favors the common stockholders, including:

The offer embeds approximately 18% premium to shareholders considering Dole’s closing share price was $10.20 on June 10 (based on his offer of $12 per share).

This is an approximately 19% premium to shareholders based on the volume-weighted average share price for the month preceding June 10.

By considering any assumption of debt obligations, the offer provides a 10.2-fold bid based on Dole’s expected EBITDA of $150 for the entire year of 2013

Stockholders Won’t Buy it, Sued Management

However, regardless of the compelling letter and numbers, investors are worried that the CEO is utilizing his power in the company and “inside” information regarding the operations of Dole’s business in an attempt to buy out the company “on the cheap.” Bloomberg reported that the skeptical shareholders have already sued the directors of Dole in Delaware Chancery Court with allegations that if the offer is accepted, it will not maximize shareholder value.

It is a reasonable expectation that if the CEO himself is willing to purchase shares at $12, he must know how to increase the value further. Hence, Dole’s stock has been slowly climbing beyond the offer price and is currently trading at $12.86 as of June 18. If we look closely, the proposal issues prerogatives that at $12, the bid will be paying 10.2x EBITDA to common stockholders. However, if we include non-core assets to the equation, at 10.2x EBITDA the bid should have been at $16.4 per share - higher than Dole’s 52-week high of $15.19.

How Other Monkeys Are Handling Their Bananas?

One of the major revenue streams of Dole is marketing products based on bananas. Two of Dole’s top competitors are Chiquita Brands International (NYSE: CQB) and Fresh Del Monte Produce (NYSE: FDP). As a high volume and low cost producer and with 64% revenue coming from bananas, Chiquita is North America’s top banana producer. It went through some major internal restructuring in recent years and currently the company has an EPS of negative -$8.46. However, with a 52-week stock price range of $4.62 - $11.23 the company has increased its market capitalization by 143.07% in the last 12 months. Fresh Del Monte, under the DEL MONTE brand, has a global operation of producing fruits and vegetables, including bananas, similar to Dole. Although it currently boasts a positive EPS of $2.10, over the last 12 months the company’s stock price moved somewhat chaotically with a positive trend. Its stock price has a 52-week range of $22.27 - $27.97, which constitutes a mere 25.6% gain. Comparing these two major competitor’s stock gains to Dole reveals that as a whole the banana industry has been doing well despite low demand and the falling price of bananas.

Gimmick or Decent Intention?

In retrospect, almost a decade ago Mr. Murdock had played this same deal when Dole was a much bigger company. Dole went private at $33.50 a share with a net valuation of $2.5 billion.

The fact that Dole’s current stock price jumped above $12 (currently at $12.86) is a testament that investors are expecting a higher bid from either Mr. Murdock or someone else.

As far as StarMine is concerned, Dole has an intrinsic value of only $9.46, almost 21% lower than Mr. Murdock’s bid. It is also possible that because Dole’s stock price dropped almost 32.7% since September 2012 from the lifetime high of $15.16 before the proposal was presented, that this bid could be an attempt to recover Mr. Murdock’s own stock value by creating a gimmick. After all, he still owns 39.5% of the company. However, managing member of Westchester Capital Management and fourth largest stakeholder at Dole, Mr. Roy Behren, think the bid was “sufficient to start a negotiation.” So, of course, he thinks it should go a bit higher. Perhaps in the range of BB&T’s projections?

Conclusion

Regardless of the true motivation behind the proposal, it is certain that the offer has put Dole at the center of attention, and if banana prices rebound anytime soon, it will surely help Dole and its competitors to grow their bottom-lines substantially and, in turn, their stock prices. 

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