In the largest one day gain on a spinoff announcement we can recall, Dean Foods(DF) jumped over 40% yesterday
after announcing it would be spinning off its WhiteWave-Aplro business. The Wall Street Journal reports that this is due to excitement about the company’s smaller organic business “which accounts for less than a fifth of group sales, but 40% of operating profits.” Annual sales in the WhiteWave business have “climbed 64% over the past five years to reach $2.1 billion in 2011, while its larger fresh milk nonorganic business has risen 24% over the same period.”
Hence, CEO Gregg Engles has opted, somewhat unusually, to go with the smaller company. Clearly, he, like investors, prefers to be in a branded, value added business to a commodity one. Engles and investors might be wary as the company may struggle to maintain margins on organic products:
Consumers continue to show a willingness to pay higher prices for organic dairy products: A half-gallon of organic milk at the grocery store currently costs about $3.27, or about $1 more than standard milk, according to the U.S. Department of Agriculture.
Still, expanding the organic-milk supply has been a big challenge for Mr. Engles and the soon-to-be-independent WhiteWave division. That is because persistently tight supplies have led to higher prices that Dean Foods has struggled to pass onto customers.
Profit margins are much better among dairy alternatives such as soy milk and the company’s Pure almond-milk brand, thanks to far lower input costs.
With yesterday’s jump, much of the upside may already be priced in. But investors should pause before betting against Mr. Engles, who has, through aggressive acquisitions, built Dean Foods from a modest player to a behemoth.
Disclosure: The author holds no position in any stock mentioned
- No Use Crying Over Spun Milk: Catch The WhiteWave! Dean Foods To Spin Off Branded Beverages Division (stockspinoffs.com)
- This Food Stock Has Investors’ Heads Spinning (fool.com)
- Dean Foods to IPO Branded Dairy Unit (blogs.wsj.com)
- Dean Foods shares surge on Whitewave IPO plans (marketwatch.com)