Dole Might Opt To Slim Down

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Dole Might Opt To Slim Down
Dole canned products.

A separation of Dole Food Co.’s businesses could be in the works, but will it be enough to pull the company out of its troubles?

Executives of Westlake Village’s Dole recently revealed that the company is in talks to sell or spin off its fast-growing packaged foods business in the biggest sign yet that the company is serious about splitting up since it launched a strategic review in May.

The plans came to light when Chief Executive David DeLorenzo disclosed them during a July 19 earnings call. He said all parts of the business were being looked at, but specifically mentioned a potential sale or spin-off of its packaged foods business.

He also said that the company could combine packaged foods with its Asian operations into a standalone company through a joint venture or initial public offering in Asia.

“We believe we are on track to achieve one or more of these possible transactions or any other transaction in connection with the strategic review by the end of the year,” he said.

The talks are happening in the midst of Dole’s ongoing struggles with lagging share prices and a heavy debt burden.

Shares had dropped more than 30 percent in the year before the earnings call, hurt by volatile produce prices and sluggish sales in Europe.

But after the call, investors were optimistic. Dole shares rose 20 percent last week, making the company the second-biggest gainer on the LABJ Stock Index. (See page 32.)

Still, despite last week’s bounce, the company is trading at about $10, below the $12.50 it opened at in 2009.

The company went public that year to raise money to pay down some of its debt, about $2 billion at the time, but still has about $1.7 billion outstanding.

Heather Jones, an analyst at BB&T Capital Markets in Richmond, Va., said that investors have been concerned about the company’s money problems.

“Their leverage is pretty substantial, there’s not a lot of equity coverage on the name so it’s not very well understood, you have a controlling shareholder with (majority owner) David Murdock, and some components of their business are volatile,” she said. “The company is worth far in excess of where the shares are trading.”

A Dole spokesman declined to comment.

Bright spot

Amid the slump, Dole’s brightest spot has been its packaged foods business, which accounted for about 17 percent of its revenue last year.

The business, which sells products including canned pineapple, canned pineapple juice, fruit juice concentrate, fruit in plastic cups and frozen fruit, is Dole’s fastest-growing segment, with 15 percent sales growth from 2009 to 2011. Its profit margin of 8 percent last year was more than double that of Dole’s fresh fruit and fresh vegetables businesses.

Dole has been eyeing further growth in the area, snapping up Carson-based healthy snack food company Mrs. May’s Naturals Inc. in March for an undisclosed sum.

Analysts believe the packaged foods business could fetch about $1 billion in a sale due to its high earnings – more than Dole’s current market capitalization of about $935 million.

DeLorenzo told investors that Asian companies have shown strong interest in the unit, and that it could get a better offer or stock market valuation in Asia. About 90 percent of Dole’s packaged foods assets are in Asia, with fruit sourced primarily in the Philippines, Thailand, the United States and China, and packed primarily in Thailand and the Philippines.

“Really we kind of got into it because it was demand driven from the interest we found in that market,” DeLorenzo said.

Jones viewed a potential deal positively. She said separating the company could unlock value. She estimated that the value of Dole’s separate components could be worth from $12 to $15 a share, with a market cap between $1.1 billion and $1.3 billion. The proceeds likely would be used to pay down debt.

The remaining company, meanwhile, would still be one of the world’s largest producers of fresh fruit, including bananas and pineapples. It would look more like competitors Cincinnati-based Chiquita Brands International Inc. or Coral Gables, Fla.-based Fresh Del Monte Produce Inc. – a fresh fruit and vegetable company focused on the North American and European markets.

But Jeff Burian, credit analyst at Standard & Poor’s in New York, said that Dole’s short-term gains would need to be weighed against long-term effects.

“Packaged foods is one of their highest-margin businesses. If they’re going to sell that part of the business, what’s the profile of the remaining company?” he said. “If the transaction reduced profitability, we could lower the metrics. However, if use of proceeds (pays down debt), we could raise them.”

Debt issues

The company has been plagued by long-term debt problems since billionaire Murdock, who has controlled the company since 1985, took it private in 2003 in a deal that valued the company at $2.5 billion, financing the deal with loans.

He took the company public again in 2009 in order to help pay off some $2 billion in debt. Filings at the time showed that he had used the company to guarantee hundreds of millions of dollars in loans for outside projects, including a wellness complex in Westlake Village. The public offering reportedly was structured so that some of the money would go toward paying off debts associated with the project.

Wariness of the debts and of Murdock’s controlling interest – he retains 58 percent of shares – led to a lackluster public offering that valued the company at $1.1 billion.

Since then, the company has had trouble attracting investors and has been faced with price volatility for its fresh produce. The company reported an annual loss of $34 million in 2010. After implementing cost-cutting measures, it returned to profitability and shares topped out at more than $14 early last year. But the stock slid again after earnings slowed last summer.

In the second quarter, revenue dropped 10 percent and earnings dropped nearly 20 percent year over year, although some of that was attributable to divestitures in Europe.

In May, the company launched a strategic review to explore spinning off some of its assets. Last month, Murdock sold the Hawaiian island of Lanai, reportedly for between $500 million and $600 million, ahead of a November deadline to repay a $300 million loan he took out in connection with the 2009 IPO.

Now, analyst Jones said the company appears poised to make moves to repay some of its debts. She said a sale would be more welcomed by investors than a spin-off, as the company would have cash in hand for its debts.

“It looks like they’re committed to completing anything by the end of the year,” she said. “It doesn’t sound like they’re in the beginning stages.”

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