“At Baupost, we are always on the lookout for such overreactions, whether due to the disappointing earnings of a failed growth stock, a ratings downgrade of a bond, the deletion of a stock from an index or its delisting from an exchange, or the forced sale resulting from a margin call. Usually, fearful overreaction equals opportunity.”
--- Baupost Group’s 2009 Annual Letter
I believe that the market is currently providing an attractive opportunity for investors to purchase shares of Dole Food Company owing, in part, to non-fundamental based selling. On September 1, 2012, Dole’s Chairman David Murdock (age: 89) elected to settle a $300 million loan backed by ~24 million Dole shares in Dole stock rather than cash when it came due on November 1, 2012. As a result, shares of have come under significant selling pressure over the past two months, declining by nearly 20%.
The selling pressure comes on the heels of an extremely favorable development at Dole. In September, Dole announced that it would be selling its Worldwide Packaged Foods business and Asia Fresh business to ITOCHU Corporation for $1.7 billion in cash. Dole expects to realize ~$50 million in annual cost savings when the restructuring is complete at the end of FY 2013.
In my view, Dole is receiving a very attractive price for these assets (12.0x and 7.0x EBITDA for the Worldwide Packaged Foods and Asia Fresh business, respectively). The transaction is expected to close by year-end 2012 and Dole intends to utilize proceeds from the sale to reduce debt.
Following the proposed transaction, Dole’s Fresh Fruit segment (bananas, pineapples, etc.) will represent nearly 80% of total revenue, up from ~70% pre-transaction. While the Fresh Fruit segment is less predictable than the soon to be divested packaged foods business, the business remains a strong cash generator and should be an ongoing beneficiary of demographic tailwinds (fruit consumption increases as consumers age).
Dole boasts a high market share positions in bananas, which represents a disproportionate amount of segment sales, including the number 1 market share in the U.S. (34% share) and number 2 position in Europe (7% share). The remaining 20% of Dole’s total revenue will be derived from the Company’s Fresh Vegetables segment. The bulk of the revenues from the Fresh Vegetables segment are generated from value-added products (packaged salads and packaged fresh-cut vegetables) and the Company’s berry operations. These businesses tend to produce consistent results, are experiencing good growth, and generate superior profitability relative to the Company’s Fresh Fruit business.
Dole will continue to hold a valuable asset base following the recently announced divestiture. Notably, Dole will own 113,000 acres of land including 25,000 acres of non-core acres located on the north shore of Oahu, Hawaii. It should be noted that the Company is only farming ~2,600 acres of its land in Hawaii. Management estimates the fair market value of all of its idle land (Dole also has idle land in Latin America associated with its operations) to be over $500 million, a value that is understated on the Company’s balance sheet and is likely conservative in my view in light of recent transactions. In the third quarter of 2011, Dole sold 400 acres of land in Hawaii for $10.4 million valuing the land at $26,000 per acre, while the sale of 2,200 acres in 2008 occurred at nearly $18,000 an acre.
While the Hawaii land represents the crown jewel of the Company’s hidden assets, it is also worth noting that Dole has nearly $1.4 billion of operating loss carryforwards for a combination of federal, state and foreign tax purposes. These valuable tax assets will likely minimize Dole’s cash tax payments for many years to come.
The Octogenarian Catalyst
A favorite catalyst of value investors is the so-called Octogenarian effect. This strategy involves identifying a business run by an individual in their 80s without an obvious heir apparent. More often than not, this type of business is usually acquired sooner rather than later. In my view, the Octogenarian effect could provide a catalyst for Dole shares in the not too distant future.
Although Justin Murdock (age: 39), Mr. Murdock’s only son (his two other sons died tragically), had previously been involved in the business, I would note that in January 2011 he left his position as VP of New Products and Corporate Development. The younger Murdock is currently devoting his “full time and energy” to his CEO responsibilities at NovaRx, a biotechnology company according to a Dole SEC filing. Without an heir apparent to run the business, I suspect the entire Company could soon be sold.
At current levels, I estimate that Dole is trading at less than 5.0x EV/EBITDA on a pro forma basis. The pro forma figures assume the Company uses estimated after-tax deal proceeds of ~$1.4 billion to reduce debt to ~$275 million from $1.7 billion. After adjusting for projected net debt, corporate expenses and the Company’s underfunded pension, I derive an intrinsic value for Dole of $22 a share, representing over 80% upside from current levels.