Commentary

As Milk Market Drys Up, Dean Foods Files Chapter 11, Prepares to Sell

Hit by changing tastes and increasing competition, Dallas-based Dean Foods filed for Chapter 11 bankruptcy protection yesterday in federal court in the Southern District of Texas. The largest dairy processor and distributor in the U.S. says it has $850 million in additional financing from its existing lenders to continue operations as it talks to Kansas City-based Dairy Farmers of America (DFA), the largest dairy cooperative in the country, about a possible acquisition.

Among Dean’s more than 50 brands and private labels are DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean’s, Garelick Farms, Land O’Lakes milk and cultured products, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, Pet, T.G. Lee and TuscanDean. It bought Friendly’s Ice Cream manufacturing and retail distribution business for $155 million three years ago.

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“Dean and dairy farmers for years have grappled with consumers’ decades-long move away from traditional cow’s milk, as beverage sales shift toward bottled water, fruit juices and milk alternatives made from soy and oats,” Jacob Bunge writes  for The Wall Street Journal.

“Within the milk business … Dean’s brands have struggled as grocery chains push low-price store brands and in some cases build their own milk plants, reducing their reliance on Dean. A recent jump in milk prices, up 10% over the past three months, boosted costs while Dean has worked to close plants and reduce expenses,” Bunge adds.

“In 2018, Dairy Farmers of America, which represents about 30% of total U.S. milk production, reported a 7.5% decrease in sales to $14.7 billion. The organization said the decline was ‘primarily’ due to lower milk prices,” Nathan Bomey reports  for USA Today.

“Dean, known for its Milk Chugs product line, has lost money in eight of its last 10 fiscal quarters and has struggled as more consumers have turned to plant-based beverages. The company also lost business when Walmart opened a milk bottling plant in Indiana that now provides milk to Walmart stores in five states,” writes  Rick Barrett for the Milwaukee Journal Sentinel.

“I think that certainly was a blow for them, but it was only one of many they've had,” Mark Stephenson, director of dairy policy analysis at University of Wisconsin-Madison, tells Barrett.

Dean’s news release notes that it is in “advanced discussions” with Dairy Farmers of America to sell “substantially all assets.” 

“Despite our best efforts to make our business more agile and cost-efficient, we continue to be impacted by a challenging operating environment marked by continuing declines in consumer milk consumption,” states Eric Beringause, an outsider who was appointed president and CEO in late July. 

“The dairy producer’s bankruptcy filing and pursuit of a sale comes after it had stated in September that it would not seek a sale of the company. Dean Foods had been pursuing the possibility since the start of the year,” Dom DiFurio writes  for The Dallas Morning News.

“Beringause said in a statement Tuesday that in the three months he’s been with the company, he decided that the sale was the best path forward,” DiFurio adds.

“Even if both parties agree to the sale, the transaction would be subject to receiving higher or better offers while the company is in bankruptcy,” points out  CNBC’s Amelia Lucas.

“Wells Fargo analysts led by John Baumgartner wrote in a note to clients that they see value in the ‘company-owned refrigerated distribution assets and margin optionality from full-fat dairy products,’” Lucas adds.

Samuel E. Dean, Sr. purchased the Pecatonica Marketing Co., an evaporated milk processing facility located in northwestern Illinois, in 1925. The company took his name two years later, went public in 1963, was listed on the NYSE in 1981 and was acquired by Suiza Foods, which took the Dean name, in 2001, according to the company’s timeline. It has been actively acquiring, selling and spinning off brands for the past two decades.

Sidney H. Scheinberg, chair of Dallas-based firm Godwin Bowman PC’s bankruptcy section, tells The Dallas Morning News’ DiFurio that “the bankruptcy will help trim some of the excess production capabilities” and bodes well for a sale but he also believes Dean Foods’ predicament should serve as a warning for other milk producers.

“It’s not the economy, it’s the state of milk,” he says.

Indeed, “gone are the June Cleaver-inspired days of serving kids -- and even adults -- big glasses of milk with their meals. It now maybe makes a cameo in morning cereal bowls and then, boom, nothing. The shunning stems from questions about how healthy dairy is; how milk products gel with popular diets, like keto; concern over the treatment of dairy cows; the popularity of the vegan lifestyle; and the overhaul of school lunch menus,” observes  Zlati Meyer for Fast Company

Holy cow.

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