Dean Foods’ New Slogan: “It Seemed Like a Good Idea at the Time”

The poster child of the perils of following Wall Street’s whims must certainly be Dean Foods, the low-margin Dallas-based dairy company that almost one year ago to this day proudly “returned value to shareholders” through a special one-time, $2 billion dividend, just before commodity inflation was to rip the guts out of Dean Foods’ cost structure.

Its share price was north of $45 at the time.

Last night the same company did a spot secondary of 18.7 million shares in order to help pay the debt incurred in funding that special dividend, at a price just south of $20 a share.

Most galling to shareholders must certainly be that last night’s sale price is just a few bucks more than the $15 a share special dividend that destroyed the commodity processor’s financial flexibility to begin with.

For those who would defend the investment bankers who came up with the goofy scheme of loading a commodity processor with debt just for the heck of it—not to mention the fees—and the Board of Directors that approved the goofy scheme mainly to feel good about themselves for a few months, we say study the history of Dean Foods’ primary cost inputs and ask yourself if a low-margin, highly volatile business model justified anything more than a modest, regular dividend to patient shareholders.

Rather than re-hash the gory circumstances surrounding this travesty of corporate chest-thumping, investment banker hubris and short-term herd-following, we republish for the record accounts of both actions, on the theory that those who know their history may be less inclined to repeat it.

March 2, 2007

Dean Foods Announces Plan to Return Approximately $2.0 Billion to Shareholders Through Special Cash Dividend of $15.00 Per Share Reflects Strong Confidence in Business and Future Cash Flows; Commitment to Enhancing Shareholder Value Financed By $4.8 Billion Senior Secured Credit Facility DALLAS, March 2, 2007 /PRNewswire-FirstCall via COMTEX News Network/ — Dean Foods Company (NYSE: DF) today announced plans to return $15.00 per share to shareholders through a one-time special cash dividend totaling approximately $2 billion. The special dividend will be financed by a recapitalization of the Company’s balance sheet through $4.8 billion in new senior secured credit facilities. “Dean Foods is an organization with strong momentum as reflected in our 2006 results and positive outlook for 2007,” said Gregg Engles, Chairman and Chief Executive Officer. “Over the past several years we’ve consolidated the industry and developed a leading market position through significant strategic acquisitions and investments in building out our branded portfolio. With this platform in place, we are now entering the next phase of our evolution. Over the next few years, we will be focused primarily on leveraging our scale to drive internal growth through maximizing productivity and efficiencies across our business.” Engles continued, “Given our internal focus, our strong cash flows, and the incredible liquidity and flexibility of today’s debt capital markets, the appropriate finance decision for Dean Foods today is to increase our exposure to the debt markets and return equity capital to shareholders, while enabling them to continue to participate in the Company’s future performance and growth.”

February 29, 2008 Dean Foods to issue 19 million shares Dallas company hopes to make progress on debt repayment 10:44 PM CST on Thursday, February 28, 2008 By KAREN ROBINSON-JACOBS / The Dallas Morning News Dallas-based Dean Foods Co. said Thursday it will issue 18.7 million shares of stock, in part to pay debt from a dividend it gave shareholders last year. The new stock offering, being underwritten by Lehman Brothers, will help bring the nation’s largest dairy producer closer to the debt repayment schedule it planned on when it issued the dividend last spring, the company said in a filing with the Securities and Exchange Commission. “The operating environment in 2007 was extremely difficult, and operating results were below the expectations” Dean had when it issued the dividend, the company said in the SEC filing. “As a result, the company entered 2008 approximately a year behind its original debt reduction expectations.”

“Momentum,” as Engles found out the hard way, changes frequently.

Debt, of course, never does.

Jeff Matthews I Am Not Making This Up © 2008 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.