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Turnaround of Dean Foods Turnaround of Dean Foods: A Strategy to Milk a Shrinking Industry Turnaround Management Final Project | Professor Kathryn Harrigan December 12, 2018 Arun Nagabhairava | Divyani Kothari | Kavan Reddy | Miles Bloom | Patricia de Carvalho Barros Larcher e Ovidio | Regen Wallis TURNAROUND ASSESSMENT Table of Contents Executive Summary ....................................................................................................................................................... 3 Company Overview........................................................................................................................................................ 4 Industry Overview ......................................................................................................................................................... 6 Peer and Historical Comparison .................................................................................................................................... 7 Causes of Decline ......................................................................................................................................................... 10 M&A Consolidation and Debt ................................................................................................................................. 10 Declining Demand for Milk ...................................................................................................................................... 11 Slim Margins due to Cost Challenges ...................................................................................................................... 12 Recent Insider Trading Scandal ............................................................................................................................... 13 Liquidation Analysis ..................................................................................................................................................... 15 Waterfall Analysis ........................................................................................................................................................ 18 Chapter 11 ................................................................................................................................................................... 20 Strategic Turnaround Strategies .................................................................................................................................. 22 Valuation ..................................................................................................................................................................... 23 Recommendation ........................................................................................................................................................ 25 Conclusion ................................................................................................................................................................... 25 Exhibits ........................................................................................................................................................................ 26 Exhibit 1 : SWOT ...................................................................................................................................................... 26 Exhibit 2 : Trading and Transactions Comparables ................................................................................................. 27 Exhibit 3 : Liquidation Process Under Chapter 7 ..................................................................................................... 28 Exhibit 4 : Financials and assumptions of investing in the plant-based products business .................................... 29 Exhibit 5 : Financials and assumptions of streamlining the number of plants ........................................................ 29 Exhibit 6 : Financials and assumptions of eliminating unprofitable areas .............................................................. 30 Exhibit 7 : Financials and assumptions of increasing share of ice-cream and fresh cream products ..................... 30 Exhibit 8 : Consolidated balance sheet with restructuring measures ..................................................................... 31 Exhibit 9 : Consolidated income statement with restructuring measures .............................................................. 32 Exhibit 10 : Consolidated cash flow statement with restructuring measures ......................................................... 33 Exhibit 11 : Key ratios .............................................................................................................................................. 33 Exhibit 12 : Discounted free cash flow valuation – base case ................................................................................. 34 Exhibit 13 : Discounted free cash flow valuation – restructuring measures ........................................................... 34 Exhibit 14 : Dean Foods brand portfolio (Dec 2018) ............................................................................................... 34 Bibliography ................................................................................................................................................................. 35 TURNAROUND ASSESSMENT Executive Summary Dean Foods Company, found in 1925, has grown Stock price development over the better part of a century from a small Dean Foods (DF) Stock Performance: 2011-2018 regional player to a large diversified food company 25 70 focused primarily on fresh fluid milk, associated 60 20 50 ) dairy products, juices, and water. It operates under n o e i l c 15 l i i r 40 m P many well-known brands such as DairyPure®, LAND ( k e c 30 o m t 10 u l O LAKES®, and TruMoo®. The dairy products S o 20 V industry is characterized by razor thin, low single- 5 10 digit operating margins and has suffered a slow 0 0 1 2 2 3 3 4 4 5 5 6 6 7 7 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 decline over the past half-decade with forward- -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 c n c n c n c n c n c n c n e u e u e u e u e u e u e u looking growth expected to be anemic at best. D J D J D J D J D J D J D J Moreover, it suffers from heavy governmental Dean Foods demonstrated strong performance intervention – through Federally mandated milk throughout the half decade after the Great prices – and constant competition from large Recession, but over extension through acquisition, cooperative firms. To compound the industry wide malaise, exportation of excess milk products is legal challenges, declining addressable market, and challenging – if not impossible – due to the an unsustainable debt load has pressured the stock perishable nature of such dairy related products. in the past year. In recent periods, the decline in the industry has Selection of brands under Dean Foods been pronounced. This coincided with successive years of M&A at Dean Foods, funded primarily through heavy debt issuance. However, the trouble arising from these acquisitions was just beginning and in 2010 lawsuit were filed by US governmental agencies alleging that Dean Foods created a monopolizing provider. In 2012 a rising debt load and increasing pressure from litigation forced Dean Foods to spin off WhiteWave and Morning Star, refocusing on its core dairy business. Post- divestitures, Dean Foods focused on operating improvements and debt reduction. This led to a stable credit rating for several years until an insider trading scandal and missed earnings targets precipitated a Moody’s downgrade in May 2018. The company manages a broad portfolio of brands Presently, Dean Foods faces considerable (more than 50), driven by regional preferences and headwinds both internally – from difficult labor legacy acquisitions. unions, high integration costs, and a significant Turnaround strategy debt load – as well as externally – from a declining demand environment and governmental regulation. Our chief concern is to provide implementable recommendations to provide Dean Foods with a sustainable path to future profitability and growth. TURNAROUND ASSESSMENT Company Overview Dean Foods Company (NYSE: DF) was founded by Samuel E. Dean, Sr. in Franklin Park, Illinois, in the 1920’s. After purchasing other Illinois dairy plants Dean developed the enterprise "from a small regional dairy into a diversified food company.” Today, DF operates in the food and beverage industry and is the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States. As of 2017, consolidated net sales totaled $7.8 Billion. DF operates 65 manufacturing facilities in 31 states with distribution capabilities across all 50 states. The company manufactures, markets and distributes a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix, and other dairy products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities across the United States. DF products encompass over 50 national, regional and local dairy brands, as well as private labels including: • White milk national brand DairyPure® • Flavored milk brand TruMoo® • Regional dairy brands such as Alta Dena®, Berkeley Farms®, Country Fresh®,
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