Farmers and retailers opposed it; the Justice Department had been investigating it. Now the “stalking horse” deal has been dropped.
Bankrupt milk processor Dean Foods has called off a long-expected acquisition deal with Dairy Farmers of America (DFA). In recent months, the potential Dean-DFA merger had drawn significant blowback from a range of dairy industry stakeholders, while prompting a Department of Justice antitrust investigation.
Dean Foods, the country’s biggest milk processor, filed for Chapter 11 bankruptcy last November in the Southern District of Texas. In its announcement at the time, the company noted that it was in “advanced discussions” with DFA, the country’s biggest dairy cooperative, regarding a potential acquisition.
In February, it reached a $425 million agreement to sell the lion’s share of its milk processing facilities to the co-op. The deal, which was still in need of court approval when Dean dropped it, would have established DFA as the minimum bidder to buy out the company’s assets and given the co-op coveted “stalking horse bidder” status.
“Sometimes the insertion of a breakup fee makes it more difficult for a competing bidder because their bid has to include and go beyond that fee.”
That means any competing bid would have had to be worth at least $453 million in order to account for DFA’s initial offer, plus a $15 million breakup fee, and other costs associated with the deal, per court documents. This set up makes it financially difficult for other interested buyers to outbid a stalking horse.
“[The breakup fee] is meant to compensate it for its time and trouble,” explains Michael P. Richman, a bankruptcy lawyer at Steinhilber Swanson LLP and adjunct professor of bankruptcy law at the University of Wisconsin Law School. (Richman is not involved with the Dean Foods case.) “But sometimes …. the insertion of a breakup fee makes it more difficult for a competing bidder because their bid has to include and go beyond that fee.”
Since November, farmers and buyers alike have expressed concern that acquiring Dean would give DFA a monopoly over the national milk market. Though it bills itself as a farmer-owned cooperative that helps farmers market their milk, the organization has also expanded into the processing business, making it a major buyer. Many farmers, including DFA’s own members, have accused the co-op of price-fixing.
“As farmer pay prices decrease, DFA’s corporate profits increase.”
Dean and DFA have a well-established relationship, one that has at times been a particular object of ire for dairy farmers. In 2007, farmers in the southeast sued the two, alleging that Dean had agreed to make DFA its sole milk supplier in exchange for keeping milk prices—and thus, farmer revenue—low. (Price-fixing is illegal, but DFA’s status as a co-op exempts it from antitrust laws.) In 2013, farmers in the northeast filed a similar lawsuit. And when the Dean Foods bankruptcy was first announced, many farmers I spoke with were dismayed by what a DFA acquisition would mean for milk prices. Not only have minimum milk prices—set by the federal government to stabilize the market—been sinking in the past few years, but DFA is legally exempt as a cooperative from paying them.
“DFA’s management’s priorities are in conflict with their member farmers,” wrote a coalition of farmers and advocates in an amicus brief filed to the court earlier this month. “As farmer pay prices decrease, DFA’s corporate profits increase.”
Pushback against a Dean-DFA merger also came from buyers like Stop & Shop and Food Lion. These two supermarket chains with a collective 1,400 stores objected to giving DFA bid protections, arguing that doing so would “result in a monopoly for raw milk in various markets.” In January, The Wall Street Journal reported that antitrust regulators at the Department of Justice were probing the deal.
DFA might buy a few Dean plants in select markets, but not the majority it had originally planned to absorb.
DFA can still make a bid for Dean Foods, but it’ll have to do so without “stalking horse” perks. In an emailed statement, a company spokesperson said that dropping the deal would help “[avoid] unnecessary litigation” and would focus attention on the auction itself. In response to a request for comment, DFA executive vice president and chief of staff Monica Massey said the cooperative was “re-evaluating our options, given current circumstances, to bid on Dean’s assets.”
Could DFA just make another bid for the entirety of Dean’s assets? At least one expert doesn’t expect that to happen, given all the backlash that the co-op has faced in the past few months. Andrew Novakovic, a professor of agricultural economics at Cornell University, expects that DFA might buy a few Dean plants in select markets, but not the majority it had originally planned to absorb.
“[T]he nature of the opposition would suggest that they would need to be far more modest in their goals in order to be successful,” he says. “DFA isn’t going to forget that this is clearly a problem. Why would you stick your hand in the fire again?”
The deadline for prospective buyers to submit bids is next Monday, March 30.