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November 14, 2019

Dean Foods Bondholders Just Say No to Merger With Dairy Co-op

 |  By: Bloomberg News

Dean Foods Co., the biggest U.S. milk processor which filed for Chapter 11 bankruptcy protection Tuesday, has said it’s in advanced talks to sell assets to milk cooperative giant Dairy Farmers of America. Bondholders, however, aren’t convinced that’s a good deal.

At a first-day bankruptcy hearing, an attorney for a third of the company’s bondholders said that while Dean is “focusing exclusively” on a combination with the co-op, that option won’t be “value-maximizing.” The deal may not even be feasible due to antitrust concerns, the attorney said at the hearing in front of Judge David Jones in U.S. bankruptcy court for the Southern District of Texas in Houston.

“We don’t want a quick sale, a fire sale, without a true market check or opportunity for other potential bidders to put in a real proposal,” said Bob Britton, an attorney at Paul, Weiss, Rifkind, Wharton & Garrison LLP, which represents the group.

The bondholder group approached Dean to offer alternatives, including capital to invest in a standalone restructuring plan and alternative financing. But the proposal “made no headway,” Britton said.


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When asked by the judge if the group had enough capital to buy Dean Foods, Britton’s answer was yes.

Brian Resnick, an outside lawyer for Dean Foods, said the company’s looking forward to working with bondholders.

‘Not Bothered’

“I’m just going to sit back and watch,” Judge Jones said, responding to the company’s expressed willingness to engage with the bondholder group given their complaints about the sale. “I’m not bothered at all.”

Dean ranks as the biggest U.S. dairy processor, employing about 15,000 people and delivering about 2.2 billion gallons a year of milk and other dairy products, according to its bankruptcy declaration. The company’s long list of institutional customers includes McDonald’s Corp., Starbucks Corp. and Target Corp.

Dean has suffered as competition from almond, rice and soy milk eroded demand for conventional dairy. Retailers have also been using milk as a loss leader to bring customers in, putting pressure on the dairy giant’s margins. Losses deepened after the company’s biggest customer, Walmart Inc., built its own milk plant.

Facing financial distress, Dean looked into selling all or parts of the company among other options to strengthen its balance sheet, according to the court filing. But the company faced an obstacle in its underfunded multi-employer pension plan, for which it might wind up owing more than $700 million. That stymied any hope of out-of-court transactions, and meanwhile results were deteriorating faster than Dean had forecast, the company said.

With cash running short, Dean’s managers became concerned about “potentially ruinous customer flight’’ if the company couldn’t keep milk flowing to 30,000 school lunch rooms, thousands of coffee shops, fast-food restaurants and grocery stores. That sealed the decision to file for Chapter 11 protection, Dean said.

The case is Southern Foods Group LLC, 19-36313, U.S. Bankruptcy Court for the Southern District of Texas (Houston).

--With assistance from Rick Green.

To contact the reporters on this story: Lydia Mulvany in Chicago at [email protected];Katherine Doherty in New York at [email protected]

To contact the editors responsible for this story: James Attwood at [email protected], Millie Munshi, Simon Casey

©2019 Bloomberg L.P.

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