Dean Foods Co. struck a deal to buy Friendly’s Ice Cream, deepening the milk company’s portfolio of dairy brands that can fetch higher profit than its commodity milk business.
Dean, the largest U.S. milk processor by volume, is investing in branded milk and ice cream as a way to insulate itself from swinging commodity prices and increased consumption of dairy alternatives, even as its first-quarter results got a lift from sliding raw-milk prices.
The Dallas-based company aims to purchase Friendly’s, which sells ice cream in about 8,000 grocery stores across New England, for $155 million in an all-cash deal that Dean Chief Executive Gregg Tanner said would fill a geographic gap in Dean’s ice-cream business and add new manufacturing capabilities. The deal is expected to close by July.
“Coupled with the momentum of our current regional brands, the Friendly’s franchise will be a catalyst for growth in our ice-cream business and our brand portfolio,” Mr. Tanner told analysts on a conference call discussing first-quarter financial results.
Ice cream generated $972 million in sales for Dean last year, about 12% of its revenue.
An affiliate of Sun Capital Partners Inc. will continue to own and operate the approximately 260 Friendly’s restaurant locations, Dean said.
Dean has been grappling with swinging raw-milk prices, which in recent years have pressured its profits, as dairy alternatives such as almond and soy milk claim more store shelf space and consumer dollars. In response, Dean has invested more in brands that can support premium prices, last year consolidating its 31 regional milk brands under a national brand called DairyPure. Recently, milk markets have moved in Dean’s favor.
The company reported Tuesday that a 14% drop in raw-milk prices from the first quarter last year, which reduced Dean’s expenses, helped it swing to a $39 million profit for the quarter ended March 31, compared with a $74 million loss a year earlier.
The profit, which came despite an 8.4% decline in revenue, topped analysts’ expectations. Dean shares fell 5 cents to $18.16 on Tuesday. The stock had fallen 9% in the three months before Tuesday’s results. Mr. Tanner said Dean expects milk prices to fall an additional 7% in the second quarter, as rising U.S. milk production and lower exports keep costs down for the company. The milk business still poses challenges for Dean as Wal-Mart Stores Inc. moves ahead with a plan to build its own Indiana milk-processing plant that would eliminate about 100 million gallons of private-label fluid milk business for Dean beginning in late 2017.
While Mr. Tanner said the move wouldn’t materially affect Dean’s profit, the company does plan to cut jobs to offset the lost business.
By Jacob Bunge
Source: Wall Street Journal
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