Rumors of a potential company sale sent shares of distressed dairy name Dean Foods Co. (DF) up 10% on Monday. Takeover talk normally is good news, but in this case Dean Foods is so depressed that a 10% move took its shares to just $1.68.
Things have gotten so bad for Dean Foods that its shares are down 80% over the last year and 56% year to date. The company is struggling as the retail environment for dairy and consumer preferences both have changed, and Dean Foods can't generate a positive bottom line despite $7.8 billion in 2018 sales. The company offers a who's who of dairy brands, including TruMoo, DairyPure and Dean's milk, as well as Friendly's ice cream, which has seen better days.
The big risk here is debt, which was at $906 million at year-end. However, most of that debt is not due until 2023.
In addition, Dean Foods recently refinanced its credit facility and also cut, then ultimately eliminated, its dividend earlier this year in an effort to conserve cash. Still, the market is telegraphing the belief that the company may not survive, so any takeover talk is greeted favorably.
With a current enterprise value of about $1 billion, Dean Foods trades at about half of book value and lists more than $1 billion in net property, plant and equipment on the books, all of which might be more meaningful if the company was not in such distress.
Here on Tuesday morning the company released first-quarter results, which included a loss of 41 cents a share, which was worse than the 27-cent consensus loss. Revenue of $1.795 billion was below the $1.9 billion consensus.
If there was any potentially good news in the otherwise downbeat report, it was that the company expects to be free-cash-flow positive for the second quarter and for all of 2019. Dean Foods also reiterated that it is exploring "potential strategic alternatives" -- a phrase that makes me cringe, because it is usually mentioned when a company is close to the end of its rope.
Dean Foods does have a wide reach in dairy circles as well as significant assets, which include 58 manufacturing facilities. The company might do better as part of a larger entity, but any deal likely would be done at a distressed price. You simply can't command a premium price when your business is in disarray.