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Dole Spin-off May Improve Business, Analysts Say

Dole Food Company Inc. is considering spinning off one of its businesses, a move that analysts say could help the company reduce its debt and improve its financial position. The Westlake Village fruit and vegetable supplier, which generated more than $7 billion in revenues last year and employs more than 34,000 workers companywide, is currently considering strategic business alternatives including a full or partial separation of one or more of the company’s principle businesses, a spin-off or other capital market transactions. Analysts say Dole’s Packaged Foods division is a likely target for some strategic move. The division’s operations include the production of canned fruits and fruit juices, snack foods and frozen fruits. While details remain uncertain, it seems likely that a spin-off of the Packaged Foods business could raise between $900 million and $1 billion, said analyst Jonathan Feeney of Janney Capital Markets, who gave the stock a buy rating. “Alongside some recent step-ups to the tax basis and Dole’s $167 million in net operating loss, such a transaction could raise a significant chunk of net capital to retire the roughly $1.5 billion in debt, which seems to scare investors,” Feeney said, in a recent report on the company. In recent years, the produce giant has made significant efforts to strengthen its packaged foods segment, which has generated inconsistent sales results. In the first quarter, revenues from Dole’s Packaged Food division increased 1 percent to $267 million from $265 million in the same period last year. Last year, revenues in Packaged Foods increased 7 percent to $1.2 billion, according to public documents. The company credited the jump to improved pricing as well as higher volumes of packaged fruit products sold in Asia, and the North America frozen fruit business. Product launches at the end of the year also contributed to the increase. In October 2011, Dole introduced Fruit Smoothie Shakers, a container that includes natural fruit and yogurt and allows consumers to have an instant smoothie by adding juice and giving the container a shake. It also launched Dole Frozen Fruit Single-serve Cups, a cup containing a full-serving of fruit which consumers can store in the freezer. This year, Dole announced the acquisition of Mrs. May’s Naturals, a healthy snack maker based in Carson. The deal gave Dole the platform to expand in the natural healthy snacks space, company officials said. In the first quarter, Dole’s companywide revenues dropped to $1.6 billion, a 4 percent decrease from the same period last year. Income from continuing operations was $17 million, or 20 cents per share, an improvement from the $2 million earned in the same period last year, but still short of analysts’ expectations. Christina McGlone, research analyst for Deutsche Bank Securities Inc. said in a recent report on the company that Dole management is “aiming for a deleveraging event for the commodity side of the business.” McGlone has a hold on the stock, reducing its 2012 EBITDA estimates from $387 million to $360 million. She also reduced its EPS estimates from $1.55 to $1.29. “We believe that Dole’s share price does not reflect the inherent value of our packaged foods business as it is overshadowed by the larger commodity businesses,” said Dole president and CEO David DeLorenzo, in the company’s May 3 earnings call. This year, an oversupply of fresh vegetables in the first quarter led to dramatic price declines which resulted in a $12 million impact in profits. While sales in Dole’s packaged salads and fresh berries saw an uptick, the increase was “not enough to overcome the extraordinary drop,” DeLorenzo said. With farming serving as its core business since its founding in 1851, Dole’s commodity business often falls prey to weather, natural disasters and crop disease. The volatility of the industry has led Dole to change its status from public to private several times over the years, Feeney said. In 2003, David Murdock took the company private in a transaction that valued at approximately $2.5 billion, according to Dole’s website. Dole’s private status was short-lived and it went public again in 2009 as a means to raise more cash to pay down $2 billion in debt and invest in new products. Dole officials said it is meeting with its board of directors and managers to review the company’s options for increasing shareholder value. The review is slated to run through the end of the year, but Feeney predicts an outcome in the coming months. On May 9, shares of the produce giant closed at $10, up 50 cents from the day before.

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