Dean Foods Co. announced Nov. 12 that it and substantially all of its subsidiaries have initiated voluntary Chapter 11 reorganization proceedings in the Southern District of Texas, just two months after deciding to conclude a strategic alternative review that began in February. The company said it intends to use the process to protect and support its ongoing business operations and address debt and unfunded pension obligations while it works toward an orderly and efficient sale of the company.

Dean Foods also announced that it is engaged in advanced discussions with Dairy Farmers of America Inc. (DFA) regarding a potential sale of substantially all of its assets. If the parties ultimately reach an agreement on the terms of a sale, the transaction would be subject to regulatory approval and would be subject to higher or otherwise better offers in the bankruptcy.

“Dean Foods is operating in the ordinary course of business and remains focused on providing its customers with wholesome, great-tasting dairy products and the highest levels of quality, service and value,” the company said, adding that it has received a commitment of approximately $850 million in debtor-in-possession (DIP) financing from certain of its existing lenders, led by Rabobank.

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Following court approval, the company expects to use the DIP financing, together with cash on hand and operating cash flows, to support its continued operation throughout this process, including payment of employee wages and benefits without interruption and payment to suppliers and vendors in full under normal terms for goods and services provided on or after the filing date.

"The actions we are announcing today are designed to enable us to continue serving our customers and operating as normal as we work toward the sale of our business," said Eric Beringause, who recently joined Dean Foods as president and chief executive officer. "We have a strong operational footprint and distribution network, a robust portfolio of leading national brands and extensive private-label capabilities, all supported by approximately 15,000 dedicated employees around the country.”

He continued, “Despite our best efforts to make our business more agile and cost efficient, we continue to be impacted by a challenging operating environment marked by continuing declines in consumer milk consumption. Importantly, we are continuing to provide customers with an uninterrupted supply of high-quality dairy products as well as supporting our dairy suppliers and other partners."

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Since joining Dean Foods just more than three months ago, Beringause said he has “taken a hard look” at the company’s challenges as well as opportunities. The announcements are “the best path forward,” he stated.

“In recent months, we have put in place a new senior management team that not only has considerable experience in the dairy and consumer product industries but also in executing major turnarounds. I am confident we have the right people in place to lead us through this process. I want to thank all Dean Foods employees for their continued commitment to our customers, our partners and our company. I also want to thank our suppliers and other business partners for their cooperation and our customers for their continued support."

In conjunction with the court-supervised process, Dean Foods has filed a number of customary motions seeking court authorization to continue to support its business operations. The company expects to receive court approval for all of these requests. It also intends to file bidding procedures with the court to conduct a sale in accordance with Section 363 of the U.S. Bankruptcy Code and work with its creditors to explore a potential stand-alone plan of reorganization.

Dean Foods has been facing some "pretty stiff headwinds" for several years, Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, told Feedstuffs.

“Part of it has been shifting consumer preference for products, and some of this has been competition in the space, as well,” he said.

The first thing that came to Stephenson’s mind upon hearing the news is that DFA has been the primary supplier for Dean Foods. As such, he said it makes sense that DFA would want to look at purchasing the organization to maintain the markets it has for fluid milk sales.

“If they do that, they are still assuming the same kind of consumer problems and competition in the fluid processing space that Dean Foods had,” he explained. “I’m not sure that the issue with Dean Foods was in incompetence of running plants; it was probably just that they’ve had a lot of debt and faced some pretty stiff headwinds as far as consumer trends have been going.”

Additional information is available on the restructuring page of the company's website, www.DeanFoodsRestructuring.com.

In light of the bankruptcy filing, Dean Foods canceled its quarterly earnings call, which was scheduled to take place Nov. 12.

Dairy remains strong

Despite the notion that the latest announcement is just another sign of the dairy industry’s struggling economy, Dairy Management Inc. (DMI) said the U.S. dairy community remains a “strong and diverse sector.”

In fact, DMI relayed that the industry has achieved consistent growth in per capita dairy consumption for 25 years in a retail category worth more than $100 billion and that domestic dairy sales were up 2.5% as of August 2019. Cheese and butter are also at all-time consumption highs, it added.

Ongoing pressure from competing beverages have been affecting fluid milk sales, but DMI said it still remains a staple in 94% of U.S. households. Further, some segments have been showing strong growth in what is a $13.4 billion retail category.

“In whole milk categories alone, there has been almost a billion dollars in growth over the last three years,” DMI noted. “We’ve seen pockets of growth in lactose free as we’ve addressed the digestive concerns from consumers, and in flavored milk, we’ve seen growth with innovation and the proof that chocolate milk is the perfect post-exercise recovery beverage on the science side.”

DMI expressed confidence that, in a decade shaped by a constantly changing marketplace, “the U.S. dairy has and will continue to successfully navigate the current economic environment.”