NEW YORK (Reuters) - Dean Foods Co. DF.N said on Friday it would pay a special dividend of $15 per share, or about $2 billion, in a move seen as a defense against private equity firms looking to milk Dean for cash.
Dean, the largest U.S. dairy producer, said it would finance the special dividend through a new $4.8 billion borrowing and said the extra debt would hit its earnings.
“You pay out a dividend, you put up debt on your balance sheet that you can easily pay back in a couple of years but in the meantime you’re not an attractive LBO candidate anymore,” said Evan Mann, a senior analyst at research firm Gimme Credit.
UBS Investment Research analyst David Palmer said in a note to clients: “We believe the read-through from Dean Food’s announcement is a positive one for any company that is underlevered, and particularly ones that are attractive for private equity.”
The dividend amounts to about a third of Dean’s Thursday closing share price of $45.39. The stock rose 5 percent to $47.66 in afternoon trading.
Standard & Poor’s downgraded Dean’s debt rating further into junk-bond territory, knocking it from double-B-plus to double-B. Dean bonds fell more than 4 percentage points in early trade.
“The downgrade reflects a more aggressive financial policy, given the company’s willingness to fund this large dividend with 100 percent debt financing, and a weaker financial profile,” said S&P analyst Jayne Ross. S&P was optimistic about Dean’s cash-generating ability.
Dean lowered its 2007 adjusted earnings outlook to between $1.72 per share and $1.78 per share, excluding reorganization costs, from its February forecast of $2.33 to $2.38 per share.
Wall Street analysts, on average, had expected earnings per share of $2.37, according to Reuters Estimates.
Chief Financial Officer Jack Callahan told analysts in a conference call the company would post per-share earnings percentage growth in the mid-teens after the first quarter of 2008, once it has a year with its new capital structure in place.
Based on Dean’s prior price-to-earnings ratio and the new guidance, the stock would have a value of about $49 per share, including the dividend, Jonathan Feeney, food and beverages analyst at Wachovia Securities, said in a research note.
But he said it was a “big if” whether the market would assign the same multiple to Dean’s forecasted earnings.
Feeney also noted that equity markets have become more risk averse relative to the last 10 years, while the credit markets have become substantially less risk averse, which could lead more food and beverage companies to take similar actions.
Due to the special dividend, payable April 2 to shareholders of record on March 27, the company said it does not expect to repurchase any stock in the near term.
In 2006, Dean repurchased 10 million shares for $400 million.
After building up its business over the past several years through acquisitions, Dean said it will now focus on improving productivity and efficiency.
Dean has acquired more than 40 companies since 1993, including the 2002 buyout of White Wave, maker of Silk brand soy milk.
In November Dean said it found administrative errors in stock options grants in 1997 and 2000, and said the U.S. Securities and Exchange Commission was conducting an informal inquiry into its options-granting practices.
The financing package is being arranged by JPMorgan Securities, Bank of America Securities LLC, and Wachovia Capital Markets.
The new credit facility, which would replace Dean’s current facility, would consist of a $1.5 billion 5-year senior secured revolving credit facility, a $1.5 billion 5-year senior secured term loan and a $1.8 billion 7-year senior secured term loan.
The company would also be replacing its existing receivables facility with a new secured $500 million facility.
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