Dean Foods files bankruptcy, talks advance with DFA about assets

The map of Dean Foods’ plants around the U.S show regional brands of years gone by that are part of the Dean Foods national milk business. Some analysts observe that the refrigerated distribution network of the company make it an optionality for whole milk and full-fat dairy products as those sales are rising while overall fluid milk sales have continued declining and the company is further challenged by contract volume losses and margin losses to below-cost private-label milk wars. Alternative beverages, reduced cereal (and with it milk) consumption, and other factors are being blamed. But at least some in the industry are recognizing that as the industry’s associations and some processors, along with the government, have pushed fat-free and low-fat as what consumers want or should have, fluid milk sales suffer from an information  and education problem that has led to a consumption problem, and questions about where milk goes from here. More analysis on that next week.

By Sherry Bunting, Farmshine, Friday, Nov. 15, 2019

HOUSTON, Tex. — The dairy industry shake-up reached new levels Tuesday, Nov. 12 when Dean Foods, the nation’s largest milk bottler, filed voluntary Chapter 11 bankruptcy restructuring “for orderly and efficient sale.”

The announcement indicated that the sale of “substantially all” assets could most likely be to DFA as talks between the two parties have “advanced.”

The bankruptcy filing includes all Dean entities and holdings under one name — Southern Foods Group LLC d/b/a Dean Foods — in the bankruptcy court of the Southern District of Texas, where case judge David R. Jones signed an order the same day granting “complex Chapter 11 bankruptcy case treatment.”

The early morning announcement came just ahead of Dean’s scheduled third quarter earnings call, which was canceled, although Q3 SEC reports were filed. Dean Foods’ shares on the Stock Exchange have been halted.

A hearing of 17 motions — including provisions to pay for milk delivered in the 30 days prior to the bankruptcy filing — was slated for Wednesday afternoon, Nov. 13, where the judge granted Dean Foods’ request to pay “critical vendors” in order to continue operating during the Chapter 11 proceedings and sale.

In its pleadings, Dean specified the need to retain access to cash flow in order to pay suppliers and employees and other routine costs of doing business.

As for milk shipped after the Nov. 12 bankruptcy filing, new financing from existing lenders has been secured so that payments can be made going forward.

This is a court-supervised process, to which Dean Foods has filed a number of these customary motions seeking court authorization to continue to support its business operations, which includes paying for the milk. Dean states in the announcement that it expects to receive court approval for all of these requests and that it is officially filing bidding procedures with the court to conduct a sale.

“Our expectation, based on the motions Dean has filed and the hearing in Houston this afternoon (Nov. 13), that they will be allowed to pay for pre-petition milk shipments,” said PMMB chief counsel Doug Eberly in a Farmshine phone call Wednesday. He indicated that while any bankruptcy proceeding is unpredictable, the Board expects that the four Dean plants in Pennsylvania and the plants in other states, will continue operating and paying producers.

“This is a priority for the Board and our auditors to be out there first thing every two weeks when advance and final payments are due to make sure payments are made,” said Eberly. Pennsylvania’s Milk Securities Act administrated through the Pa. Milk Marketing Board ensures such auditing and bonding of milk dealers and handlers.

Not all states have this bonding protection; however, the motions before the bankruptcy court Nov. 13, if granted, would allow Dean to pay for the milk already shipped. Dean estimates having $100 million in commercial surety bonds, not enough to cover all of the payments to suppliers and employees and other required payments to continue operating, which is why there is an expectation that the motions that would allow the company to use cash on hand to do so would be uncontested and granted. Without this ability, the company would not be able to continue, the proceedings would become disorderly, and then no one’s interests would be ultimately served.

New financing to keep Dean operating

In order to keep the milk flowing, and to keep suppliers, vendors and employees paid in the future during the bankruptcy process, Dean has secured $850 million in new “debtor in possession” financial support on Nov. 11 from existing lenders, led by Rabobank.

Approximately half of the $850 million in new financing will be used to restructure current debt with those existing lenders and the other half, combined with cash on hand, would finance continued operations for nine months, including paying suppliers, vendors and employees “without interruption” as restructure and sale take place under Chapter 11 bankruptcy protection.

“Right now, it is business as usual for us,” notes Anne Divjak, vice president of government relations and external communications for Dean Foods in an email response to Farmshine Tuesday. “This means we are continuing to work with our raw milk suppliers so we can continue providing our customers an uninterrupted supply of dairy products.”

She notes that information about the restructuring is found at DeanFoodsRestructuring.com and additional information will be available from pleadings and motions as they are filed.

Will Dean assets be sold to DFA?

In announcing the bankruptcy filing, Dean Foods also announced it is engaged in “advanced discussions with Dairy Farmers of America, Inc. (DFA) regarding a potential sale of substantially all assets of the company.”

If the two parties reach agreement on terms of a sale, it would be subject to regulatory approval by the Department of Justice and the bankruptcy court and would be subject to higher or otherwise better offers in the bankruptcy, according to Dean announcements and statements made by DFA CEO Rick Smith in a letter to members, obtained by Farmshine Tuesday.

DFA’s largest customer

Dean Foods is DFA’s largest customer, according to Smith in his letter to DFA members, where he also indicated that DFA produces and delivers the vast majority of milk to Dean Foods.

According to the Chapter 11 bankruptcy docket, DFA is the third largest “non-insider” creditor owed $172.9 million.

In his letter to DFA members, Smith referenced this substantial amount owed to DFA as being for milk shipped prior to the bankruptcy filing, “You will receive milk checks without interruption, and milk will continue to be picked up as normal throughout this bankruptcy process,” Smith wrote.

In addition to pension funds and DFA as the top three creditors, others on the list of the top 30 “non-insider” creditors include USDA $16.8 million, Land O’Lakes $8.9 million, Saputo $8.9 million, California Dairies $7.4 million, Southeast Milk $6.5 million, and Select Milk Producers $6.2 million. Former Dean Foods CEO Ralph Scozzafava is also listed as a creditor for his unpaid employee severance of $5.4 million.

Smith explained that DFA has monitored Dean Foods’ financials closely and have “prepared for various scenarios to minimize the impact to DFA.” He also confirmed that DFA “decided to enter into discussions” about purchase of Dean’s assets.

Questions about how long DFA and Dean Foods have discussed potential sale of assets were unanswered, although previous reports indicate some level of discussion occurred prior to the bankruptcy filing and are now, according to Dean Foods, “advancing.”

Questions about how Dean Dairy Direct shippers would be handled in the event of a sale of assets to DFA, along with other questions, were not answered. Instead, a request for an interview was declined by DFA chief of staff Monica Massey, who responded to this reporter to say: “We will not be participating in an interview with you as, in the past, you have not been fair and balanced — or accurate — in your reporting.”

Dean Foods responded to questions to indicate their website will be updated frequently and their are frequently asked questions and answers there for producers and others, including a separate website devoted to the Dean restructure and sale.

As of mid-November, no Dean Direct shippers have reported any communication on any changes to their status as a result of these actions, and Dean’s spokesperson confirmed they are conducting “business as usual.”

At the root

Dean Foods had appointed a new CEO, Eric Beringause, on July 26, and then concluded a strategic review process announcing in September that a sale of the company would not be pursued, but instead work on other strategies as the company dealt with volume losses, contract losses and in the face of “rising commodity costs.”

Beringause, on the job less than four months, said in a public statement Tuesday that these actions “are designed to enable us to continue serving our customers and operating as normal as we work toward the sale of our business.”

He talked about Dean’s “strong operational footprint and distribution network, robust portfolio of leading national brands, extensive private label capabilities and 15,000 “dedicated employees.”

“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,” Beringause said.

With a new management team in place, he noted that this bankruptcy for an orderly sale is the best path forward after taking a look at the challenges.

Look for more analysis in Milk Market Moos and stay tuned. Additional information is available at www.DeanFoodsRestructuring.com

In addition, court filings and other information related to the proceedings are available on a separate website administered by Dean Food’s claims agent, Epiq Corporate Restructuring, LLC, at https://dm.epiq11.com/SouthernFoods, or by calling Epiq representatives toll-free at 1-833-935-1362.

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