Saputo to buy Dean Foods Morningstar unit for $1.45 billion

NEW YORK/TORONTO Mon Dec 3, 2012 11:26pm IST

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NEW YORK/TORONTO (Reuters) - Saputo Inc (SAP.TO) will buy Dean Foods Co's (DF.N) Morningstar division for $1.45 billion to widen its product range and increase its U.S. presence, the Canadian dairy products maker said on Monday.

The sale of Morningstar, which makes coffee creamers, Friendship cottage cheese and other dairy products, will be a big step in the breakup of Dean, which is spinning off another business into WhiteWave Foods Co (WWAV.N).

After the sale of Morningstar and the separation of WhiteWave, which sells Silk soy milk and Horizon organic milk, Dallas-based Dean will sell mostly regular milk, which is a difficult business with declining sales volumes, volatile commodity costs and slim margins due to intense price competition from store brands.

Montreal-based Saputo, which has expanded its U.S. cheese business with several smaller acquisitions, is getting Morningstar at an attractive price, analysts said.

According to Canaccord Genuity analyst Derek Dley, the deal price is about eight times Morningstar's operating earnings, compared with Saputo's own trading multiple of 11.

Dley said more deals could be on the horizon. "I don't think this acquisition means they're going to stop growing in the U.S. by any means," he said of the company, which also sells bakery products, including some Hostess products in Canada.

Saputo and U.S.-based Michael Foods were the frontrunners in the auction of Morningstar, Reuters reported last week. Other bidders included Mexican dairy company Grupo Lala and private equity firm Apollo Global Management LLC (APO.N).

Saputo said it would finance the purchase through a newly committed bank loan. It expects the deal to close by the end of the year and boost its earnings immediately.

Dean plans to use the proceeds of about $887 million net of taxes and expenses to pay down debt, which it said will give it more options to sharpen its focus on its conventional dairy business.

"We believe Dean is moving in the right direction, but we aren't convinced that it's out of the woods, as numerous headwinds could throw it off course," said Morningstar analyst Erin Lash, citing rising milk costs and tight consumer spending.

The new Saputo will have about 12,000 employees and 57 manufacturing plants in five countries.

Evercore Partners advised Dean Foods, while a source familiar with the matter said Rothschild had advised Saputo.

Dean Foods shares were up 2.4 percent at $17.55 in early afternoon trading on the New York Stock Exchange, while Saputo rose 3 percent to C$47.46 in Toronto.

(Additional reporting by Greg Roumeliotis and Olivia Oran in New York; Editing by Maureen Bavdek, John Wallace, Nick Zieminski and Lisa Von Ahn)

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