Co-ops seek bid process modifications, object to ‘stalking horse’ status in DFA bid for 44 Dean plants

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6 co-ops covering 3000 farms and 10% of milk cite bid barriers, antitrust concerns, detrimental impacts

By Sherry Bunting, Farmshine, Friday, March 13, 2020

HOUSTON, Texas – New ripples emerged this week in the Dean Foods Company (Southern Foods Group LLC) Chapter 11 sale proceedings in the bankruptcy court of the southern district of Texas.

Just three days before the March 12 hearing on Dean’s motion to approve DFA as “stalking horse bidder,” an ad hoc committee for dairy cooperatives filed a limited objection on Monday, March 9 regarding the Feb. 17th DFA-Dean asset purchase agreement that covers a majority of Dean’s assets.

If Judge David Jones grants stalking horse status to DFA’s $425 million bid for 44 of the 57 plants and other itemized assets and liabilities, this would become part of the bidding procedures, which the March 12 hearing is expected to further outline, and it would provide certain protections to DFA’s initial bid.

“A potential sale of assets to Dairy Farmers of America Inc. (DFA), if approved, would effectively consolidate DFA’s grip on the national milk market. The ripple effects of the sale will detrimentally impact all of DFA’s competitors, from the largest dairy cooperatives and milk producers, to the smallest farmers,” the objection stated.

“For exactly this reason, the ad hoc committee, which includes certain creditors of (Dean) and competitors of DFA, was formed to… monitor the Chapter 11 cases, examine the impact that a sale to DFA would have on their businesses, and to the greatest extent possible, ensure that some semblance of fairness remains in the competitive process for the benefit of all dairy cooperatives,” the objection stated.

The ad hoc committee represents what is described as a broad cross-section of U.S. farm milk, covering over 3000-member dairy farms producing nearly 10% of the nation’s milk.
Six cooperatives are listed in the objection, and they have a mix of circumstances — one is a creditor of the debtor (Dean Foods) some are non-creditors except for non-pool payments that are owed, some are current suppliers of Dean Foods, and some are competitors in retail milk distribution.

According to the objection on the case docket, the six co-ops are:

• Lone Star Milk Producers, Inc., based in Wichita Falls, Texas with 120 member farms in eight states, marketing 1.9 billion pounds of milk annually;

• Agri-Mark Inc.,with 850 member farms in New England and New York marketing 3.3 billion pounds of milk annually;

• Cayuga Marketing, LLC, based in Auburn, New York with 30 member farms producing 1.3 billion pounds of milk annually;

• Cobblestone Milk Cooperative, Inc., Chatham, Virginia with 19 member farms from Virginia to Georgia marketing 0.6 billion pounds of milk annually;

• Maryland and Virginia Milk Producers Cooperative Association Inc., with 930 member farms in multiple states of the Midatlantic and Southeast producing 2.5 billion pounds of milk annually; and

• Michigan Milk Producers Association with 1300 member farms in Michigan, Ohio, Indiana and Wisconsin producing over 5 billion pounds of milk annually.
The limited objection seeks to address “certain fundamental flaws in the bidding procedures,” which “exacerbate the antitrust issues that plague the debtors’ proposed sale to DFA.”

• In a separate action, Southeast Milk, a Florida-based dairy cooperative also filed a similar objection this week.

At the start of the Chapter 11 cases that were all lumped together under Southern Foods Group LLC, the debtors, Dean Foods, proclaimed intentions of expanding the sale and marketing process and of exploring restructuring alternatives. Instead, the objection asserts that Dean Foods “spent months negotiating and finalizing proposed bidding procedures with DFA that only serve to create unnecessary competitive issues.”

Cited barriers to competing bids included the multi-step qualification process and compressed time frame that make it difficult for others to bid, including the use of terms that are not defined.

“Perhaps by design, these procedures make it a foregone conclusion that DFA will be the successful bidder for all stalking horse assets, even assuming that an auction were to occur,” the objection states.

On these and other grounds, the ad hoc committee for dairy cooperatives filed the limited objection and submitted that, “The proposed bidding procedures are not reasonably designed to secure the highest and best bid for the sale of the bid assets.”

While the debtors assert their proposed bidding procedures were designed to facilitate a flexible, robust and competitive bidding process, the objection asserts that, “The debtors have closely held all sale-related information and other information that they consider to be potentially confidential.”

In addition, objections are raised about the bidding procedures being “strategically crafted to prevent any of the stalking horse assets (44 plants) from being siphoned off by DFA’s competitors and broken down into auction lots that could yield a greater aggregate sale price for the debtors’ estates.”

The breadth of the DFA-Dean asset purchase agreement is a barrier if approved as ‘stalking horse’ assets because few, if any, bidders could compete on those assets collectively — keeping potential regional buyers that could be affected by the outcome from actually bidding.

Several modifications are requested, including how qualifications are set, how much discretion is given to Dean on separating auction lots, extension of the time frame, and a dual track auction process that would provide for back-up successful bidders and back-up alternate bidders for auction lots as separate sale transactions in the event that the DOJ does not provide the necessary regulatory approval for the sale to DFA.

Stay tuned.

 

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