UPDATE 2-Dean Foods to sell 18.7 mln shares in public offer

(Adds stock move, analyst comments)

NEW YORK, Feb 29 (Reuters) - Dean Foods Co (DF.N) said on Friday that it would sell 18.7 million shares of common stock in a public offering and use some of the proceeds to reduce its debt, sending shares to their lowest level in five years.

Dean Foods was hammered in 2007 by record prices for raw milk, while excess supplies of organic milk drove prices down in that segment.

Last year the company borrowed $4.8 billion to finance a special $15 per share dividend, a move that was seen by analysts as a defense against a possible takeover by private equity firms.

"Until very recently, (Dean Foods) was saying it would be able to meet its covenants," J.P. Morgan Securities analyst Pablo Zuanic said in a research note. "So either the Dean Foods view about the dairy industry worsened in the last two weeks, or Dean Foods was wrong in assuring investors it would meet debt covenants."

Lehman Brothers would underwrite the offering, which Dean said would increase outstanding diluted shares by about 13 percent.

Shares were trading down 8 percent, or $1.84, to $21.15 in morning trading on the New York Stock Exchange, after sinking as low as $21.03 earlier in the session.

"We entered 2008 approximately a year behind our original debt reduction expectations," Chief Executive Gregg Engles said in a statement.

"Raising capital at this time allows us to reduce our outstanding debt to levels more consistent with our initial expectations and significantly reduce our interest expense in the years to come."

The largest U.S. dairy processor and distributor said proceeds would also be used for general corporate purposes, including future investments or acquisitions.

The company said it is on track to meet its prior first-quarter earnings forecast range of 15 cents to 20 cents a share and its full-year earnings target of at least $1.20 per share.

Analysts, on average, have been expecting first-quarter earnings of 18 cents a share and full-year earnings of $1.30 a share, according to Reuters Estimates.

The company said it expects the proceeds from the offering to reduce interest expense for the rest of 2008 by about $20 million. (Reporting by Justin Grant; Editing by Derek Caney)