MOODY'S CONFIRMS RATINGS OF DEAN FOODS AND MAINTAINS POSITIVE RATING OUTLOOK
New York, 07-28-98 -- Moody's Investors Service has confirmed the ratings of Dean Foods Company and maintained a positive rating outlook following the announcement that the company reached a definitive agreement to sell its vegetable business to Agrilink Foods, a wholly-owned subsidiary of Pro-Fac Cooperative. Dean Foods will receive $400 million in cash as well as Agrilink's aseptic foods division, which had $100 million in 1997 sales. The confirmation reflects the strategic logic of both divesting the vegetable business, which exhibited a relatively volatile and low return on investment for the company, and acquiring Agrilink's aseptic operations, which provides a logical fit to Dean Foods' higher-margin Specialty business segment. The confirmation also incorporates Dean Foods' strong market position as a low-cost processor of fluid milk, as well as the likely benefits from the company's ongoing efforts to acquire and integrate smaller dairy processors.
Dean Foods' rating outlook is positive. To the extent that Dean Foods is successful in achieving efficiencies with newly-acquired assets, maintaining the healthy operating performance of its existing businesses, and preserving a prudent financial structure, the rating could be upgraded.
Ratings confirmed are:
Senior unsecured notes and medium term note program at A3.
Prospective rating under the company's shelf registration for senior unsecured debt at (P)A3.
Prospective rating under the company's shelf registration for subordinated debt at (P)Baa1.
Dean Food's vegetable segment had relatively high inventory requirements and was relatively vulnerable to volatile vegetable prices. The business - which includes both private-label vegetables as well as established brands such as Birds Eye, Freshlike, and Veg-All - accounted for $553 million in sales or about 17% of the company's revenue. Following the divestiture, Dean Foods will predominately be a dairy processor, although the company continues to operate pickle and specialty segments, which accounted for about 21% of fiscal 1998 revenue.
A focus on achieving cost efficiencies and marketing higher-margin products provides the company with a comparative advantage in an industry with low margins and intense competition. Dean Foods is the largest processor of fluid milk in the United States and, as a result of operational efficiencies and low overhead, a low-cost dairy operator. The current rolling out of "Milk Chugs," new single-serve plastic containers, should help drive the company's dairy volume by offering more convenience to the customer.
Dean Foods has been aggressively expanding its dairy business through acquisitions. In fiscal 1998, the company completed eight dairy acquisitions, with total annual sales of approximately $750 million. We believe that the company will continue the rapid expansion of its dairy business through additional acquisitions. Although traditionally a regional business, the U.S. dairy industry is undergoing a period of rapid consolidation. The three largest processors - Dean Foods, Southern Foods Group, and Suiza - currently process a quarter of the nation's milk and are actively acquiring smaller properties in an effort to build economies of scale, establish strong regional presences, and position themselves as potential national players. Over the intermediate term, this consolidation process could lead to a more favorable pricing environment within the dairy industry. However, competition among these largest processors to acquire prime properties may drive purchase prices and multiples higher, thereby decreasing investment returns. The financial prudence and discipline Dean Foods displays as the company continues to acquire dairy properties will be a key rating factor going forward.
Dean Foods Company, headquartered in Franklin Park, Illinois, is a major dairy and specialty foods processor, with consolidated sales of about $3.3 billion for the fiscal year ended May 31, 1998.
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