Outdoor Update, Dean Foods Spinoff

Random tangent:

The investment game feels like it’s getting a lot more democratized and less opaque than before. Many of the best places to look for value from the past are now well-known. And definitely more people are in the game than ever.

Quick basketball update:

Played a good game today overall but wanted to make note of one situation – my teammate was posted up on the block trying to seal baseline while I was in the corner and my guy was backed up slightly to cover the pass. I ended up swinging the ball back out, but I should probably have tried driving middle and looking to dish to the big as he cuts baseline.

Outdoor Channel update:

Gahh. Remember when I wrote about Outdoor a few weeks back? I eventually got scared off because of what a crappy deal it was for the OUTD shareholders (which was important because if the deal was oversubscribed, I might’ve been stuck with shares in the NewCo) and because the price immediately got away from me. But let it be known – Stan Kroenke came in at $8.75 per share, trumping InterMedia Outdoor’s offer. Current Outdoor share price? $8.77/sh. Lesson learned? When the deal is bad for shareholders, it’s all the more reason to buy! Low downside if it breaks and some small likelihood that a bidding war erupts.

Dean Foods spinoff:

Dean Foods is spinning off a high-growth soy milk type business called WhiteWave and leaving behind a core dairy distributor.

Trade execution:

WhiteWave has already begun to trade under the symbol WWAV, whilst Dean Foods (DF) actually continues to hold a large portion of WWAV. In the next 3 months, DF is supposed to distribute .8 shares of WWAV for each share of DF. Thus one can own the underlying dairy stub by going short .8 WWAV shares and long 1 share of DF.

+ Current price of DF: $18.08 per share

+ Current price of WWAV: $17.02 per share

+ Implied stub price: $4.46

Trade thesis: 

The underlying dairy business is supposed to generate $.45-$.55 earnings, giving it a P/E multiple of 8-10. Several websites that I have read claim that this is cheap compared to 12-15 for most food businesses.

My take:

For now, I’m against this trade. The stub dairy is said to be carrying $1.387B leverage after the split. That’s extremely levered considering $84M current FCF and $150M FCF in the out years. Therefore, the P/E ratio deserves to be low. In addition, I think the P/E should be this low due to the poor growth prospects of dairy over the next few years – not only is volume projected to stay flat or decline slightly but also prices are going down due to the reduced spread between farmers and grocery stores (which is essentially the source of Dean’s revenue).

Now, I don’t know where comps are trading and it could very well be no more levered than competitors, but I’d be surprised. I’d guess that the competitors that people are pointing at 12-15 multiples have branded products and pricing power, rather than being essentially commodity producers.

Additional reading:

arbideas.com/top-situation-alert-df-and-wwav-report/

sumzero.com/headlines/food_beverage_and_tobacco/DF/160-spin-off-alert-dean-foods-stub-is-a-cheap-pure-play

gurufocus.com/news/210772/how-to-play-the-dean-foods–white-wave-spinoff

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