dean Foods’ Long-Ago Business Strategies & Huge debts Backfired by Pete Hardin Dean Foods wasn’t afraid to selectively “buy” business at Walmart and Starting in the mid-1990s, Suiza Foods — the predecessor corporation of Sam’s Club. Several years ago, Dean Foods paid Walmart roughly $15-$20 mil - Dean Foods – came rocketing out of nowhere to become the nation’s predomi - lion to gain selected access to Walmart/Sam’s Club stores in the region extending nant fluid milk processor by December 2001. roughly from the Ohio/Indiana border out to Omaha, Nebraska. That “payola” was aimed at keeping out a pesky competitor – Prairie Farms – from encroaching Suiza’s climb to the top of the fluid milk processing pile was built upon on Dean Foods’ desired store accounts. repeated acquisitions of fluid milk companies, starting with a modest firm in Puerto Rico (Suiza). In late December 2001, the newly installed George W. Bush administration’s Antitrust Division awarded a Christmas present to the 2007: $15/share dividend on borrowed $$$ Dean Foods’ all-time stupidity, when it came to incurring needless debt, Texas-based “home-boys” bankrolling Suiza’s debt-backed string of acquisi - traces back to early 2007, when the company announced it would pay to stock - tions. That gift? Hurry-up approval by federal antitrust overseers for consoli - holders a one-time, $15/share bonus. Previously, Dean Foods’ common stock - dating of the nation’s two largest fluid milk processors: Suiza Foods and (old) Dean Foods. Although Suiza was the acquiring firm, the merged entity retained holders received no earnings pay-outs. That one-time, $15 share was covered by the more familiar Dean Foods name, starting in late December 2001. borrowed money totaling $1.96 BILLION. Suiza Foods’ meteoric rise among the fluid milk processors was bankrolled In late winter/early spring 2007, Dean Foods’ stock promptly rose by by Texas-based, big-money boys – specifically, the mega-billions controlled by approximately $15/share. Insiders, such as Engle$, enjoyed a big pay-out. Once investment giant Hicks, Muse, Tate and Furst. Tom Hicks, who bought the Texas that pay-out occurred, values for Dean Foods common stock fell backwards by Rangers major league baseball team from an investor group that included George a little more than $15/share. But the $1.96 BILLION in debt remained – the W. Bush, was the lead money man at Hicks, Muse, Tate and Furst. The strategy interest costs from which ate into future cash reserves and operating profits. of those investors was to invest heavily in several key sectors of the economy, The March 2007 issue of The Milkweed reported estimates on how Engle$ while their Texas amigo in the White House encouraged federal antitrust officials and certain other Dean Foods’ directors lined their pockets with that $15/share to take a nap. Other sectors of Hicks’ heavy investments yielded massive market pay-out. We repeat those directors’ pay-outs here: shares in arcane sectors of the U.S. economy, including ice companies (such Gregg L. Engle$ ...... $39,636,885 Reddy Ice) and radio stations under the Clear Channel empire. Alan J. Bernon ...... $10,868,400 The “front man” at Suiza Foods (and post-merger, Dean Foods) was Ivy Hector M. Nevares ...... $ 9,303,670 League-educated Gregg Engle$ , the ultimate money grabbing yuppie. (The Milk - John R. Muse ...... $ 3,714,315 weed historically has spelled Engle$’ name with a dollar sign instead of an “s” – Jim L. Turner ...... $ 2,661,645 for good reason.) Engle$’ tenure at Dean Foods oversaw a tremendous string of Those five directors holding the most Dean Foods’ shares enjoyed a acquisitions – driven by borrowing. The growth behind Suiza and then Dean $66,185,115 pay-out from the $15/share dividend. But the dividends enjoyed by Foods was based upon borrowed billions. At one point in the 2009-2010 period, those top five directors were peanuts, compared to what financial institutions Dean Foods was carrying debt equal to roughly half of its annual sales volume. reaped. But Engle$ strategically bailed out as Dean Foods’ CEO and board chairman, taking with him Dean Foods’ most profitable subsidiary business as he headed $15/share dividend paid $743 million to banks for the exit – the White Wave division. In retrospect, Dean Foods borrowing $1.96 BILLION to pay out a one- Post-merger, the acquisitions kept on coming. Dean Foods’ market share time, $15/share stockholder bonus offers a stinking example of the financial irre - in some regions and sub-regions reached astounding levels. For example, a Mas - sponsibility that gripped many major players in the U.S. financial world … prior sachusetts official estimated that Dean Foods held a 70% market share for all to the Great Recession. In March 2007, The Milkweed listed the following banks packaged fluid milk sold in New England. And in highly-populated southern and financial institutions that held large amounts of Dean Foods’ stock shares. New England, Dean Foods held an 80% market share, that same official warned Hard to believe, but the following array of banks and lending institutions stashed Vermont’s United States Senator Patrick Leahy. Then, and presently, Leahy has away $743 million of the $1.96 BILLION borrowed (no doubt from some of the served as an “asleep-at-the-switch” member of both the Senate Judiciary and same institutions) to pay out the $15/share dividend. Agriculture Committees who has watched Dean Foods and Dairy Farmers of America eviscerate competition in the Northeast’s dairy industry – from farm to Barclays Global Investors UK Holdings ...... $163,943,700 supermarket dairy case. Iridian Asset Mgmt, LLC ...... $108,764,205 United States Trust Co. of NY ...... $ 82,392,735 A couple examples from southern New England reflect Dean Food’s strategic Vanguard Group, Inc...... $ 69,782,085 use of debt to erode competition in fluid milk processing/distribution in that region: State Street Corp...... $ 63,707,160 • Dean Foods paid $50 million to a regional supermarket chain – Stop and Deutsche Bank Aktiengesellshaft ...... $ 57,704,295 Shop – to cease fluid milk processing at its Readville, Massachusetts plant. In JP Morgan Chase & Co...... $ 55,581,630 turn, Stop and Shop took virtually its entire supply of packaged fluid milk from Mellon Financial Corp...... $ 53,107,545 Dean Foods. Goldman Sachs Group ...... $ 50,573,550 • In the late 1990s, Suiza Foods paid around $300 million to acquire New Capital Research & Mgmt. Group ...... $ 37,500.000 England’s largest fluid milk processor – Garelick Farms. Spirited bidding for the The devil-may-care borrowing (and lending) habits of major corporations prized Garelick business took place between Suiza and (old) Dean Foods. A for - and financial institutions, leading up to the Great Recession, was a heck of a mer (old) Dean Foods executive later confided that his fellow senior manage - party (for them) … while it lasted. ment team members were blown away by the price Suiza bid to acquire Garelick – an acknowledged gem among fluid milk processing firms . Post-Great Recession, back to reality Dean Foods, under Engle$, wasn’t afraid to cross the line when it came to The Great Recession, which hit this nation and the world during the second anti-competitive behaviors. Why worry about antitrust? Friends at the Bush II half of 2008, forced untold billions of taxpayer bailouts for financial institutions White House offered a cloak of immunity. In late summer 2006, a joint state- and a big run-up in federal debt. Presently, it’s been too easy for federal legisla - federal antitrust task force, which had started in late spring 2004, recommended tors and policy makers to forget just how close to the brink of Depression the indictments against Dean Foods and Dairy Farmers of America for federal unchecked, runaway financial largesse preceding the Great Recession brought antitrust law violations. But politically-connected higher-ups at the United this nation. The Obama administration inherited a financial sack of s _ _ _ from States Department of Justice’s Antitrust Division blocked those recommended the outgoing Bush II … and performed a near-miracle restoring this nation’s indictments. (During the Bush II administration, The Milkweed reported a high- economy and currency to far sounder bases. level DOJ Antitrust official – Joan Huggler – confided to a Vermont dairy farm The past decade has been a brutal period for the nation’s fluid milk busi - woman that the Antitrust Division couldn’t touch Dean Foods.) ness. The Great Recession dug into consumer dairy product demand, exacerbat - In the late 1990s, documents obtained in a subsequent private antitrust law - ing already deteriorating fluid milk sales trends. In truth, per-capita demand for suit showed how Dean Foods conspired with Dairy Farmers of America (the fluid milk had been deteriorating for at least three decades, prior to the Great nation’s largest dairy farmers’ cooperative) to restrict regional dairy producers’ Recession. But that financial catastrophe worsened the business and marketing milk marketing options and payments for milk in both the Southeast and North - climate for Dean Foods and competing fluid milk processors. During the past east. Without admitting guilt, Dean Foods privately settled litigation in the decade (or so), per-capita fluid milk sales have regularly declined by one to two Southeast for $140 million, as well as separate litigation in the Northeast for $30 percent annually. Worse yet, the Great Recession reduced birth in the United million. (That latter settlement was peanuts, in the analysis of The Milkweed.) States – slowing down the re-supply of “new milk drinkers.” Further, it may be Legal fees paid to Dean Foods’ attorneys were not disclosed. argued that cutbacks to calorie content (i.e., flavor) of school milk products by the Obama administration has hurt both school milk demand as well as making Debt. Debt. And more debt. youngsters less enthusiastic about drinking milk away from school. Thus, the By about 2009-2010, The Milkweed reported that Dean Foods was carrying nation’s fluid milk processing sector has been forced into cannibalistic behav - approximately $6 Billion worth of debt on about $12 Billion worth of annual sales. iors, fighting over an increasingly small-sized pie. Even for the big boys like Dean Foods, profits in fluid milk processing enterprises remained relatively modest. Six Billion dollars of debt on $12 Billion worth of In this difficult climate, Dean Foods has struggled. And those struggles are annual sales was not a sustainable business model for a fluid milk processor. reflected in the company’s common stock values. Investors have bolted. In early January 2017, Dean Foods’ common stock was around $22/share. But dur - More troubling … Dean Foods’ marketing strategy for fluid milk was to ing 2017 – a year when the overall value of the stock market increased by about rely too heavily on a single , big customer – Walmart and its related Sam’s Club 30% — Dean Foods’ common stock plunged by 50%, down to the $11/range. In business. Walmart’s fame as the “low price leader” extended to its procurement 2018, a series of bad announcements pulled down Dean Foods’ stock value to practices for packaged fluid milk. Dean Foods was often able to underbid com - just under $8.00 per share, prior to a very recent rebound that was perhaps relat - peting dairy processors for volume-rich, but “net margin poor” Walmart and ed to the plant closings. Sam’s Club accounts. 6 — The Milkweed • June 2018 Continued on page 7 —for bulk buyers of cheese & butter Ad Touts Class Action Lawsuit vs. nMpF, CWT & Co-ops by Pete Hardin What is the basis of claims against NMPF All told, for the years 2003 – 2009, Brown cal - Here they go again … additional legal entan - and others? culated that the CWT program had killed 506,921 head glements for National Milk Producers Federation Simply stated, plaintiffs allege that NMPF cre - of dairy livestock and paid 2,802 dairy farms to exit (NMPF), the Cooperatives Working Together” ated the CWT as an illegal, price-enhancing tool out - production. Brown estimated, with carry-over eco - (CWT) program, and various co-ops belonging to side the boundaries of the Capper-Volstead Act’s nomic impacts beyond the single years in question, NMPF and CWT. provisions for a “marketing agency in common.” that CWT boosted United States dairy farmers’ milk incomes by at least $9.5 billion. Each time Brown The June 1, 2018 issues of two weekly cheese For the first seven (or so years) of CWT’s opera - tions, NMPF collected ten cents per hundredweight issued such claims of success, NMPF ballyhooed industry newspapers — Cheese Reporter and Dairy those results. Trouble was … wily animal rights Market News – sought to inform some purchasers of of production from about three dozen participating cooperatives. That money was used to bankroll a activists were watching, and pounce d on Brown’s cheese and butter that they were potentially eligible analyses. as members of a class action lawsuit. cow-killing program aimed at reducing farm milk production and improving farmers’ milk prices. The headline for that advertisement reads: Under CWT’s herd reduction program, dairy NMPF settled first case for $52 million “If you bought butter or cheese directly farmers could submit bids (based on annual produc - After several years of protracted legal wran - from a cooperative that was a member of CWT tion) to be paid to kill their herds. (Farmers also gling, in which NMPF’s legal defenses were repeat - between December 6, 2008 and July 31, 2013, a received compensation from the sale of their animals edly consigned to the trash bin by the presiding fed - class action lawsuit may affect your rights.” to slaughter.) All told, during CWT’s cow-killing eral judge, NMPF settled the first of these lawsuits in Simply summarized: Firms that bought cheese spree (from 2003 through 2010), just over 500,000 late 2015 or early 2016, pre-trial. or butter from a cooperative that was a member of head of dairy livestock were slaughtered. In late Ironically, Brown’s annual calculations of the CWT program during the time frame in question 2010, NMPF shifted to a two-cent per hundredweight CWT’s impact raising all dairy farmers’ milk are apparently already included as members of the deduction used to fund subsidizing dairy exports. prices served nicely as plaintiffs’ attorneys’ Class. The advertisement seeks to inform eligible In early June, NMPF’s board of directors claims for damages … right down to the penny firms of their option to exit as members of the Class. extended the CWT program by three years. They per hundredweight, every doggone year ! Basical - Eligible firms must formally exit as Class members have to keep the merry-go-round rotating, to keep ly, NMPF provided plaintiffs’ attorneys with the by July 30, 2018. money coming in to pay all the legal bills. rope to legally hang NMPF. The advertisement notes that the “Court has In court documents from the animal rights decided that the Class includes all persons and enti - Potential financial damages? activists’ legal challenge to CWT, NMPF’s lawyers ties in the United States that purchased butter and/or Here’s where it gets dicey for NMPF. As per vigorously debunked Brown’s economic impact cheese directly from one or more Members of usual, NMPF had to repeatedly brag about the “suc - analyses, claiming that Brown’s estimates of CWT’s Defendant, Cooperatives Working Together, and/or cess” of the CWT cow-killing program. Annually, financial returns were in error! their subsidiaries” … during the period in question. NMPF paid economist Dr. Scott Brown of the Uni - A list of all CWT member cooperatives and their versity of Missouri to calculate CWT’s net impact on Currently, four cases pending … subsidiaries is available at the following website: dairy farmers’ milk income. Brown performed his With four more cases challenging CWT’s www.ButterandCheeseClassAction.com task well … maybe too well. According to plain - legality, NMPF has its hands full and faces runaway tiffs’ July 10, 2015 complaint filed in the Winn-Dixie legal costs. It’s time for NMPF and the dairy coop - What’s this all about? Stores et al . v. National Milk Producers et al ., Brown eratives that participated in CWT to come clean on The Milkweed has visited the above-cited web - calculated that CWT’s cow-killing boosted all dairy what legal costs have been incurred and possible site and was directed to a firm based in Beaverton, farmers’ milk prices by the following annual financial exposure to future settlements. One other Oregon for in-person answers. At press time, this amounts per hundredweight: question has merit: What law firm did NMPF use to publication was still waiting for someone to call- 2003 ...... $0.05 put together the CWT program??? back to answer questions. 2004 ...... $0.18 All these burgeoning legal costs and potential Absent that response, The Milkweed’s capable 2005 ...... $0.42 liabilities could destroy NMPF. 2006 ...... $0.67 research department has detailed FOUR separate Good thing that plaintiffs’ lawyers pursued 2007 ...... $0.75 Class Action lawsuits targeting NMPF and CWT for legal careers and didn’t become dairy farmers. 2008 ...... $0.71 alleged, illegal price enhancement. These lawsuits They’re demonstrating extraordinary abilities to 2009 ...... $1.54 are in addition to one filed by animal rights activists milk something for all it’s worth … and then some. several years ago that resulted in NMPF agreeing to 2010 ...... n.a. pay a $52 million settlement about a year and a half ago. Those lawsuits include: CWT Lawsuit Seeks Customers at Agri-Mark’s VT Cheese Store • Winn-Dixie Stores, Inc. et al. v. Southeast by Pete Hardin Milk, Inc., et al . [C.A. No. 3:15-01143 filed in fed - Impressions Salon, Inc., et al ., v. National Milk eral court for the Middle District of Florida (Jack - One Class Action lawsuit targeting the Producers, et al. That case is being adjudicated sonville Division).] Cooperatives Working Together (CWT) program in the United States District Court for the South - ern District of Illinois. The case number is: 3:13- • First Impressions Salon, Inc. v. National Milk is clearly aiming to add cheese-buying consumers to the list. CV-00454—-NJR-SCW. Judge Nancy J. Rosen - Producers Federation , et al . (C.A. No. 3:13-00454 stengel presides over this case. The First Impres - In early June, an advertisement appeared in filed in Federal Court for the Southern District of sions Salon, Inc. case has been combined with the Valley Advocate (a weekly newspaper that Illinois.) two other similar cases. • Belle Foods Trust, et al . v. National Milk Pro - covers the Connecticut River valley). That ad seeks consumers who purchased butter or cheese On the web site maintained by Plaintiffs’ ducers Federation et al . (C.A. No. 3A:14-01014, attorneys, there is a list of nearly 60 United States- filed in the Federal Court for the Southern District of at the Cabot Cheese store in Quechee, Vermont. The headline of that newspaper ad read: based dairy cooperatives that have participated. Illinois.) At first glance, many of those co-ops are smaller If you bought butter or cheese directly • Piggly Wiggly Midwest, LLC, et al . v. dairy co-ops that were coerced into joining CWT from the Cabot Quechee Store between Decem - National Milk Producers Federation, et al . (C.A. No. by Dairy Farmers of America or Dairy Marketing ber 6, 2008 and July 31, 2013, a class action 3:14-00750, filed in the Federal District Court for Services, Inc. DMS is not listed as a defendant in lawsuit may affect your rights.” (Cabot is a sub - the Southern District of Illinois.) the legal matter. sidiary of Agri-Mark, the predominant New Eng - (Editor’s note: Due to the similarity of plain - land dairy cooperative.) Agri-Mark is one of the Interested persons may glean more informa - tiffs’ charges and their common venue, proceedings named defendants in lawsuits targeting alleged, tion from the “Frequently Asked Questions” por - for the three civil actions filed in the Southern Dis - illegal price enhancement conducted by CWT. tion of the following website, which is dedicated trict for Illinois have been combined into a single to the CWT Class Action lawsuits: proceeding.) The specific lawsuit in question is First www.ButterandCheeseClassAction.com dean Foods’ Long-Ago Business Strategies & debts, con’t

Tough business climate getting tougher … Strengths? Perhaps Dean Foods could be repurposed as a beverage and Dean Foods’ management is publicly focused on gaining internal efficien - refrigerated/frozen foods distribution entity. Growing sales of water and tea cies – easier said than done. Meanwhile, the competition for retail fluid milk offer growth opportunities for the beverage industry as a whole. And Dean accounts is brutal. Walmart has built a new fluid milk plant at Fort Wayne, Indi - Foods’ distribution routes, in selected locations, have added production lines to ana – volumes that will come out of Dean Foods’ hide later in 2018. The Euro - deliver various additional products to customers. pean investors owning East Coast supermarket chains such as Hannaford’s, In summary, Dean Foods’ debt-driven, go-go years have left the firm ill-pre - Giant, and Food Lion are replacing Dean Foods as a supplier of packaged milk. pared for a far leaner , tougher future … particularly as Walmart tries to start up its Industry sources estimate that those combined losses from Food Lion and other first fluid milk plant with rumored plans for more such plants bouncing around the chains would total around 40 million gallons per year. (In the late February 2018 dairy industry. Fluid milk processing/distribution is a brutal environment right now. conference call with investment analysts, Dean Foods’ management convenient - ly didn’t mention the pending loss of the Food Lion et al. accounts.) The Milkweed • June 2018 — 7