Dole Food Breakup Seen Bearing Fruit With 58% Return
Dole Food Co. (DOLE), which has evolved from a Hawaiian pineapple purveyor into the world’s largest producer of fresh fruit and vegetables, would now stand to reap almost 60 percent for shareholders by splitting itself up.
The Westlake Village, California-based company last week said it was considering options including a breakup after its shares dropped by a third in the past year, the second-worst performance among North American food makers with market values larger than $500 million. Dole is now trading at a lower valuation relative to sales than 97 percent of the industry, according to data compiled by Bloomberg.
Dole’s shares have slumped as earnings swings at the company’s produce operations overshadowed higher profit margins from packaged foods such as fruit cups and popsicles. The fresh fruit, vegetable and packaged foods businesses could be worth a combined $15 a share in a breakup, 58 percent more than yesterday’s closing price, said Paradigm Capital Management Inc. CreditSights Inc. says proceeds from a possible spinoff could be used to help pay down the company’s $1.69 billion in debt, which is twice the current market value.
“On a sum-of-the-parts basis, the company seems to be pretty significantly undervalued,” Jason Ronovech, an Albany, New York-based money manager for Paradigm Capital, which oversees about $2 billion including Dole shares, said in a telephone interview. “We’ve seen the packaged foods business the past couple of years put up pretty consistent results.”
Marty Ordman, a spokesman for Dole, said he couldn’t provide any updates on the company’s review and referred instead to Chief Executive Officer David DeLorenzo’s comments on the company’s May 3 earnings conference call.
“We believe that Dole’s share price does not reflect the inherent value of our packaged foods business,” DeLorenzo said on the call. “In order to unlock this value, we have initiated a review of strategic alternatives, seeking to enhance shareholder value.”
Dole is considering separating or spinning off one or more of its businesses, among other options, DeLorenzo said. The company will be evaluating options for the packaged foods business in particular, he said.
Dole’s roots go back to about 1851, when Castle & Cooke Inc. was formed by missionaries in Hawaii. The company later gained control of the Hawaiian Pineapple Co., the firm founded by James Dole that made pineapples almost synonymous with Hawaii, and introduced the Dole brand in 1933.
Billionaire Chairman David Murdock took Dole private in 2003 after rescuing the food producer from bankruptcy about a decade earlier. He brought Dole public again in 2009 at $12.50 a share and retains a 58 percent stake in the company, according to a May 3 regulatory filing.
Shares of Dole, which now sells everything from organic bananas to fruit bars and bags of salad, dropped 24 percent since the initial public offering through yesterday amid fluctuations in earnings at the company’s fresh fruit and vegetable operations.
Operating profit from fresh fruit, Dole’s biggest business, was down 43 percent last year from 2009, according to the company’s annual regulatory filing. In the first quarter, Dole said results were hampered by “extraordinarily low prices” in all major commodity vegetables.
“They’ve admittedly had some difficult quarters,” Heather Jones, an analyst for BB&T Capital Markets in Richmond, Virginia, said in a telephone interview. “The vast majority of those have been attributable to either their fresh vegetables or fresh fruit business, while the packaged food business has been growing nicely. It’s pretty stable.”
The company last year earned about 3 cents before interest and taxes for every dollar of fresh fruit and vegetable sales. Margins in the packaged food business were more than twice that.
At yesterday’s closing price of $9.50, Dole was valued at 0.12 times its reported sales, according to data compiled by Bloomberg. That’s the second-lowest among food makers in North America with more than $500 million in market value. The group trades at an average of 0.98 times.
Including net debt, Dole was valued at $2.5 billion as of yesterday, which is 6.9 times analysts’ 2012 estimates for earnings before interest, taxes, depreciation and amortization. That’s cheaper than 76 percent of its peers, according to data compiled by Bloomberg. It was valued at 0.97 times shareholder equity, or less than half the industry median, the data show.
“The market is putting a multiple on the whole company similar to other commodity types of businesses that have challenges short term,” said Paradigm Capital’s Ronovech. “That’s why the overall company’s valuation is well below what’s probably its intrinsic value.”
Dole rose 5.3 percent today to $10 in New York, the third- biggest gainer among stocks that make up the Russell 2000 Consumer Staples Index.
Separating Dole’s packaged foods, fresh fruit and vegetable businesses could yield a combined $12 to $16 a share, based on earnings multiples of comparable companies, according to BB&T’s Jones.
The company’s packaged foods unit, which boosted sales more than any other division since 2009, could be worth almost $1.1 billion, including net debt, Jones said. The fresh fruit business could be valued at $1.4 billion, and the vegetable operations at almost $280 million, she said.
“The whole business is trading cheaper than their peers, so it’s an example where one and one is probably going to equal three,” Jones said.
Jonathan Feeney, an analyst at Janney Montgomery Scott LLC in Philadelphia, estimates Dole could be worth more than $14 a share using a sum-of-the-parts analysis.
Carla Norfleet Taylor, a credit analyst for Fitch Ratings, said that unless Dole pays down a sufficient amount of debt, a spinoff of the packaged foods unit will lead to an increased burden for the remaining entity. Taylor, who’s based in Chicago, put Dole’s debt under review for a possible ratings cut depending on the strategic steps the company takes.
Dole’s $1.6 billion in net debt is 4.4 times its 2011 Ebitda, a higher leverage ratio than 95 percent of North American food manufacturers with more than $500 million in market value, data compiled by Bloomberg show.
“Their business risk would increase” if Dole were to lose the cash flow from the packed foods division, Taylor said in a telephone interview. “Debt reduction would be needed to improve credit statistics.”
Dole would likely use the proceeds from listing the packaged foods business as a separate publicly traded stock to help pay down some of its borrowings, according to Wen Li, an analyst at CreditSights in New York.
Lots of Land
The transaction would also allow Dole to move some of its debt to the new company’s balance sheet so that the more volatile fruits and vegetables business won’t be overburdened, said BB&T Capital’s Jones.
Another way Dole can reduce debt is to sell some of its land in Hawaii, which may be worth as much as $400 million, Carla Casella, a credit analyst for JPMorgan Chase & Co., wrote in a May 4 note. In a breakup, Dole could be valued at as much as $19.70 a share, including its property, she wrote.
“They have a lot of land that isn’t being used for anything productive right now,” Paradigm Capital’s Ronovech said. “When you factor that in as well into a sum of the parts, you can make a case for an even higher valuation.”