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Let be begin by saying that I really like Sum Zero.  No, I'm not a full fledged member.  I suppose that's partly because I'm not a career hedge fund manager, but probably also partly because I'm too busy to every do a huge fancy write-up on any of my investment ideas.  Regardless, I get Sum Zero's weekly market dispatch for the common folk and I enjoy it.

This week's issue contained an idea that normally would be right up my alley:

Spin-Off Alert: Dean Foods Stub Is A Cheap Pure-Play

Unfortunately, I have already been there and done that with Dean Foods (DF).  I owned the stock for a couple of months and sold it earlier this year at basically break even, give or take a few dollars (not in the share price, but in absolute terms). My score here in CAPS for DF was a -9.54% return for    -17 CAPS points.  I could have held on to see if I the pick would go positive again and would not have a negative impact upon the silly CAPS accuracy score, but I don't try to scam the system here any more.  If I sell a stock in real life, I sell it here.  I have been adding sold stocks to my Watch List after dusting it off, just to see whether I made the correct decesion in selling in retrospect.

OK, here's a clip of the Sum Zero pitch:


Dean Foods is a Dallas-based milk producer that’s grown through acquisitions, financed by debt, since the early nineties. It’s now seeking liquidity by spinning off its divisions. It just completed a private sale of its Morningstar division, which made coffee creamers, netting $887m.

Also, it began an equity carve out of White Wave this quarter, selling off 13% of the company and receiving 1.16B in combined stock proceeds and dividends from White Wave (White Wave paid a large one-time dividend to Dean Foods). According to Dean Foods investor relations, the plan is to distribute the rest of the company to shareholders sometime in March / April. Once White Wave is distributed, all that will be left is the Fresh Dairy milk business.

White Wave had a successful offering, and is currently trading at a very high P/E of 28x 2012 earnings guidance. Because of this P/E level, we do not recommend holding WWAV. Instead we recommend buying DF, and shorting out the equivalent amount of WWAV shares to create 1 share of DF Fresh Dairy.

Big Picture

Going forward, the guidance from DF management is that with the reduced debt load, DF will be better able to manage the ups and downs of the business, and that the milk business still generates high free cash flow.

While the milk business is not a great one, given Dean’s focus on cost and debt reduction, we feel that the business risk given the expected holding time of five months (January - May) is low, and is outweighed by the significant discount the Fresh Dairy business will be offered at.

At an implied market cap of ~$700m for Fresh Dairy, and a debt load of $1.3B, total enterprise value is 2.15B, and with operating income for Fresh Dairy of $424m for the past twelve months, this works out to a EBITDA / TEV yield of around 19%, or a multiple of just 5.

To me, Dean Foods is a very similar situation to Cincinnati Bell (CBB).  I am a current CBB shareholder.  I first talked about why I found the company interesting a little over a year ago here in CAPS, A Valuable Flea Hidden on a Big Dog.  At the time of my first writing on the subject, it did not occur to me that CBB would retain a significant ownership position in Cyrus One that would make it more valuable.  CBB's stock ran up when people began to realize this and it fell right back down recently when shareholders became disappointed that the company would reinvest in its business rather than returning money to shareholders.

Back to the similarities between DF and CBB.  Both involve slower, weak, larger business that decided to spinoff a smaller, faster growing divisions to unlock value. In Dean Food's case, the stodgy milk business spun off its White Whave division, which produces organic products and nut / soy derived products.

So why did I sell DF?  I sold because the milk business is absolutely terrible. Worse than I initially thought.  I wonder why people are drinking less milk today?  Were't we told that drinking milk is good for us as kids? 

Dean's milk business is very similar to CBB's land line business in that it has been in a slow, but stead decline. It also has terrible margins. Dean's White Wave spinoff, seems intersting, but...I think that it's a tad overpriced at the current level plus I'm nut sure that it has a sustainable competitive advantage.

I see DF's core business as being even lower quality than CBB's retained operations in that at least CBB has a chance to do something with the fiber business, if you believe its management will reinvest wisely. Both the stubs for CBB and DF seem to be trading at similar multiples when looking at EV to EBITDA. Furthermore, I see the upside of CBB's spinoff CONE data center business as being significantly higher than WWAV's business. As a result, if I was going to play a situation like this,I'll take my chances with CBB, which I have done with a smallish position. Again, I no longer own DF.

Anyone come across any interesting special situations lately, or stock ideas in general for that matter?  I'd love to hear them.

Thanks for reading and sharing everyone.  I hope that you have a great weekend!


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