By Sherry Bunting, Farmshine, Friday, February 21, 2020
HOUSTON, Tex. — Dean Foods Company announced Monday, Feb. 17 that it has reached an initial agreement with Dairy Farmers of America (DFA) regarding sale of a substantial portion of Dean’s assets. The two parties have entered into an asset purchase agreement that was filed in the Southern Food Group bankruptcy case with the Court for the Southern District of Texas in Houston this week, along with other motions.
This is just a first-step in a legal process that will unfold over the next several months and begins with Dean’s motion seeking court approval of DFA as the “stalking horse bidder” with an initial bid of $425 million at a hearing set for March 12.
A “stalking horse bidder” is the low-bid that can be accepted by the debtor in a court-supervised sale, and with certain bid protections for that bidder if other bids are offered.
The agreement includes 44 of Dean’s 57 currently operating plants and other of Dean’s assets as well as certain liabilities related to these assets. But, as learned in an email interview with a Dean Foods spokesperson and a review of court documents, this is not an all-inclusive price for the 44 locations as certain real property connected to these assets is named as for additional purchase.
Furthermore, 14 of Dean’s operating plants and 13 closed plants and/or distribution depots are listed as excluded from the DFA-Dean agreement.
This agreement still requires the approval of the U.S. Department of Justice (DOJ) and the United States Bankruptcy Court for the Southern District of Texas.
Anne Divjak, Dean Foods vice president for government relations and external communications, indicates that the company is cooperating with DOJ’s probe of antitrust concerns by providing requested information and answering questions.
Timeline and competing bids
A timeline for court hearings has been set beginning with the March 12 hearing to approve DFA as “stalking horse bidder.”
Interested parties with competing bids for the assets included in the DFA-Dean agreement as well as bidders for assets excluded from that agreement have until March 31 to provide the court with information in order to be considered as qualified potential bidders.
Those qualified bidders will then have until April 13 to submit bids.
A court-supervised auction would then be conducted sometime in April with an approval hearing set for April 27.
Divjak confirmed that Dean is speaking with other parties interested in acquiring assets – including some that are interested in assets excluded from the DFA-Dean agreement. Court documents also confirm that Dean is speaking with advisors and creditor committees about other restructuring options, though no details are provided.
Court documents reveal further that Dean Foods and investment banker Evercore Group, hired in February 2019 to evaluate potential strategies for the future, began negotiations with DFA in October 2019 — believing DFA to be the entity “likely to contribute significant value to the debtor’s businesses,” but they failed to reach agreement prior to the bankruptcy petition date of November 12.
After November 12, Evercore began communicating with additional potential strategic and financial buyers while continuing to engage with DFA, according to court documents.
These documents described the past three months in which Evercore received incoming interest from nearly 100 entities, including 55 potential strategic buyers (18 of them regional dairy companies) and 44 potential financial buyers. Of that number, 38 parties were provided with confidential information regarding Dean’s business. Several of those, including DFA, expressed interest in considering a transaction with Deans and were granted access to a data room containing additional confidential information on the bid assets.
Court documents also show Dean’s explanation that it continued to follow a “competitive process and arm’s length negotiations… to secure a bid from DFA,” which now pertains to the motion filed with the court on Monday seeking approval of DFA as the “stalking horse bidder.”
According to a Dean press release at the Dean Foods restructuring website (https://deanfoodsrestructuring.com/), president and CEO Eric Beringause states that, “We have had a relationship with DFA over the past 20 years, and we are confident in their ability to succeed in the current market and serve our customers with the same commitment to quality and service they have come to expect.”
At a Northeast Dairy Leadership meeting in Syracuse, New York right after the Dean bankruptcy filing in November, DFA CEO Rick Smith was quoted in a Berry on Dairy blog post to say: “Everybody’s been telling me for years that we are the logical owner of Dean’s. And I’ve already gotten phone calls about people who want to partner with us. We will be interested in some assets, undoubtedly. And not interested in some, undoubtedly. Some (assets) should be closed. Some will require partners.”
Of the assets excluded from the DFA-Dean agreement, half are currently operating plants and half are plants that are closed. Of the 13 closed plants Dean is looking to sell, eight were closed 15 to 20 years ago, several of them in 2001; and five were closed more recently in 2018 when over 130 dairy producers in eight states lost their Dean contracts after Walmart’s first milk bottling plant opened.
What’s included in the DFA-Dean agreement?
Included in the DFA-Dean agreement are all four currently-operating Dean plants in Pennsylvania – Lansdale, Lebanon, Schuylkill Haven and Sharpsville — along with the Florence, New Jersey plant.
Also included are one plant in New York, two in Massachusetts, two in North Carolina, one in South Carolina, two in Florida, two locations (three plants) in Tennessee, five in Texas, two in Ohio, two in Michigan, two in Indiana, three in Illinois, one in Iowa, one in Wisconsin, one in Idaho, two in Utah, one in Nevada, one in New Mexico, two in Montana, two in Colorado, one in California. The Barber Pure plant in Birmingham, Alabama is split with only the ice cream business being included in the Dean-DFA agreement while the fluid milk business has been excluded.
Brand assets that are part of the agreement include DairyPure, TruMoo and Steve’s Ice Cream.
Subsidiaries in Mexico are also mentioned in the agreement. Furthermore, Dean holds an ownership interest with Organic Valley in Organic Valley Fresh, and this distribution joint-venture is included in the DFA-Dean agreement.
Dean’s motions filed this week also seek certain “relief” items in the final auction process, including provisions that DFA would assume certain contracts and leases referred to as “proposed assumed contracts” that are connected to the sale transaction.
How this affects Dean Dairy Direct milk suppliers is unclear in terms of protection under the transfer of these milk supply contracts under the sale of related assets.
On Wednesday (Feb. 19), a hearing was conducted to handle a motion filed by a dairy farmer in Tennessee to end his milk supply contract with Dean to pursue a new contract with another milk buyer out of concern about potentially losing his Dean contract after the sale of assets is approved. Under bankruptcy court-supervised sale and reorganization, critical vendor contracts cannot be terminated or changed by either the debtor (Dean Foods) or the vendor (dairy producer) without court-approval. The outcome of the hearing was not yet available.
What’s excluded from the DFA-Dean agreement?
Among the 13 closed plants that are excluded from the DFA-Dean agreement are the recent closures of Meadow Gold in Erie, Pennsylvania, a Garelick plant in Lynn, Mass., and the Dean plants in Braselton, Georgia, Louisville, Kentucky, Florence, South Carolina and Livonia, Michigan.
They are all for sale, according to Divjak, who indicated Dean was “actively looking for buyers for these facilities before the asset purchase agreement was announced.”
Among the 14 operating plants that are excluded from the DFA-Dean agreement are notably the Land O’Lakes plants in Sioux Falls, South Dakota and Bismark, North Dakota, and several other Minnesota plant locations.
According to Divjak, the Land O’Lakes brand is not part of the DFA-Dean agreement. Dean has a long-term licensing contract with Land O’Lakes cooperative to use the brand name and Indian Maiden logo for fluid milk and soft products sold from Dean plants. That licensing agreement, which Divjak said could be negotiated by potential buyers, also applies to other Dean plants as whipping cream, half-and-half and other products sold under the Land O’Lakes brand name are found at supermarkets nationwide, while the Land O’Lakes line of whole milk, 2% reduced-fat, 1% low-fat and fat-free milk is a well-known brand with a following in the western Minnesota, South Dakota and greater Central Plains region.
Dean Foods’ minority interest in Good Karma, a flaxseed alternative non-dairy beverage, is not part of the agreement and is separate from the bankruptcy proceeding.
Before the November 12 Chapter 11 bankruptcy petition, Dean Foods had secured special financing of $850 million to underpin its position as debtor-in-possession as well as gaining court approval to use operational cash flow to continue operations and payments to critical vendors during bankruptcy and sale. The special financing was previously expected to keep operations going for about nine months — through July or August.
ADDENDUM PUBLISHED IN MARKET MOOS COLUMN:
Revealing details in Dean deal
A conference hearing Wed., Feb. 19 in the Dean Foods bankruptcy and court-supervised sale case in Houston, Texas, available by teleconference, revealed many details as motions were heard. Attorneys representing the creditors committee, lenders committee, bondholders committees, Dean Foods, DFA, and a growing list of interested parties covered some sale transition concerns and concerns of creditors about the the low bid of $425 million by DFA that Dean is asking Judge David Jones to approve as a “stalking horse bid” at a hearing set for March 12.
Attorneys argued that the flow of necessary proprietary information from Dean Foods to other parties interested in offering bids has been stalled and delayed to the point where other interested parties were learning about what plants are included and excluded in the DFA-Dean agreement for the first time on Monday — the same day as the rest of the world found out via press release from Dean Foods.
For example, the adhoc bondholders committee is still waiting on a critical piece of information related to milk payables. In that regard, an attorney representing the creditors committee revealed that DFA — as a large creditor of Dean Foods with significant payables — could have a $1 for $1 deduction in its bid offer to secure its claims that other creditors do not share because DFA is also a critical vendor.
Judge Jones had earlier commented that the business model of the company “worked great in the 1960s but not 2020.” As a self-proclaimed “numbers guy,” the judge said he has looked at the numbers and done the math, and his assessment was hinted at when he commented that there is a sense of urgency to get this deal done so that the bankruptcy proceedings do not fall on the backs of vendors, including farmers and communities.
He said he did not want to be responsible for schoolchildren not getting their milk if the process is protracted for too long and the company fails.
He also stated that, “If integration fixes the problem, we ought to be working on integration.”
Toward that end he asked the entities to work together to see to it that the information needed flows to where it needs to go, but responsibly, and that he will give hearings and listen to all qualified interests, but that he did not want motions and proposals that simply waste the court’s time.
Also, a dairy farmer seeking permission to end his milk supply contract with Dean in February was granted permission as he asserted concerns about ultimately losing the contract after the company is sold and had another option for his milk.