DOLE FOOD CO INC DOLE
March 28, 2013 by
cuyler1903
2013 2014
Price: 10.71 EPS $0.00 $0.00
Shares Out. (in M): 89 P/E 0.0x 0.0x
Market Cap (in M): 956 P/FCF 0.0x 0.0x
Net Debt (in M): 260 EBIT 0 210
TEV: 1,216 TEV/EBIT 0.0x 5.8x

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Description

DOLE is not just a fruit and vegetable company.  DOLE is a real estate and hard asset company with a fruit and vegetable operation attached to it.  Investors are dramatically underestimating the incredible breadth and value of DOLE’s non-core assets (it’s not just farmland!), causing DOLE shares to trade at a severely depressed multiple of what management has stated are trough earnings.  On Monday, DOLE will close on the sale of its Asian businesses for $1.7 billion, allowing the company to retire virtually all of its debt, creating a dirt cheap stub trading at 3-4x PF EBITDA that is begging to be re-levered for a large special dividend or share buyback and/or taken private.  I estimate fair market value for DOLE shares is at least 50-100% higher than the current price, with a large margin of safety and even greater potential upside based on performance, financial engineering and likely underestimated hidden asset value.

Key Non-Core Assets

  • Management stated on p. 10 of the M&A presentation that there is “Over $500 million FMV of non-core assets (e.g. idle land)” – this number is likely severely understated given the complex maze of DOLE’s holdings, but we can use that as our base case (I have ignored taxes here as these values are so wide-ranging and tax implications are unknowable, our conservatism should easily outweigh any tax)
  • Management seems to have incentive to understate the value of the hidden assets here - Murdock probably wants hidden asset value to be kept as low profile as possible (he may want to buy more DOLE stock or take it private again)
  • 18,260 acres of Oahu, Hawaii land currently listed for sale with $217mm asking price
    • CBRE offering:  http://www.cbre.us/o/baltimore/properties/oahu-land/pages/overview.aspx
    • CBRE price and parcel list:  https://docs.google.com/file/d/0B0xSSQ9VQorNSjdvOHFEVTh4dlU/edit?usp=sharing
    • ~6,740 acres of other non-core Hawaii land (p. 4 of M&A presentation states 25k non-core Hawaii acres in total
    • 1 Dole Drive, Westlake Village, CA – corporate headquarters
      • Sits on 30 acres of owned land in one of the toniest sections of LA County, land likely worth $0.5-1.0mm per acre
      • Reported $65mm construction cost for 169k s.f. office building
      • Profile of property:  www.tedmeeder.com/files/Download/Dole.pdf
      • Dole leases 1,483 s.f. to Laboratory Corporation of America for $115,674 per annum, or $78/sf (per 2007 10-K)
      • Applying $78/sf to the entire 169k s.f. building yields $13.2mm of annual rent, at a 7.5% cap rate you get a value in excess of $175mm for this building alone
      • 2 Dole Drive, Westlake Village, CA – Four Seasons-Westlake Hotel
        • Sits on 20 acres of owned land adjacent to corporate headquarters
        • Tenants include Four Seasons-Westlake Hotel, California Health & Longevity Institute (a high-end clinic/hospital), Westlake Wellbeing Properties, LLC and World Championship Sports Network, Inc.
        • It is unclear as to what ownership DOLE may have in the various structures on the property, but it appears that it may be significant since p. 10 of the M&A presentation stealthily cited “other” assets including “offices, housing compounds, schools and hospitals.”
        • While I think it makes sense to assume that DOLE does not own these buildings, I think it might…  Read here: http://www.hotel-online.com/News/PR2005_2nd/Apr05_DoleSeasons.html)
        • Assessed value of improvements alone is $159mm here https://docs.google.com/file/d/0B0xSSQ9VQorNTFFRZFJyV1NnRkU/edit?usp=sharing
        • “Heavy Iron” – Bombardier Global Express – Tail #N85D (http://registry.faa.gov/aircraftinquiry/NNum_Results.aspx?NNumbertxt=N85D)
          • Estimated value range of $15-25mm for this plane
          • Owned Latin American offices in San Jose, Costa Rica and La Ceiba, value unknown
          • Owned European regional offices in Sweden, value unknown

Notes on Pro Forma Valuation

  • 2013 Pro Forma EBITDA guidance of $150-170mm, which increases to $200-220mm after inclusion of $50mm of cost savings, use Q4 conference call presentation and transcript
  • Management calls this “trough” earnings on the M&A call:  “I think it's fair to say that we believe the banana business is in a trough right now. It's been affected, obviously, by the European economy. We're not sure what the length or duration of that trough is. But certainly, if you go back, as you said very well, if you look at historically, our earnings have been higher than they are today, and we would expect some recovery at some point in time. We do believe that we have a very strong banana business.”
  • Cost savings to be fully run-rated by end of 2013; these are hard cost savings, the majority of which management said will come out of corporate
  • Expecting all debt to be retired, with new term loan in the amount of ~$260mm in place at closing – this is the anticipated gross debt level, although my math very conservatively assumes the $91mm of cash goes away and $260 is the net debt level
  • One-time “strategic” capex need relating to farm rejuvenation and fleet enhancements will be covered by cash from operations and the term loan, per management
  • Normalized ongoing capex of $60-70mm per management
  • Pro forma cash interest expense of $16mm (~6% rate), cash taxes of $7-10mm (~20% rate) and annual pension contributions of $18mm, all per management
  • Potential for substantial excess working capital to be pulled out of business post-closing, per Q&A on M&A call, I have assumed this is $0 in my calculation at the bottom

The Math

 ($MM)                       
   Current   Adj   PF                 
 Stock Price   $        10.72    $        10.72                
 Shares Outstanding                89.2                 89.2                
 Equity Value              956.2               956.2                
                       
 - Cash                 (92)                   92                      -    assume $0 cash for conservatism; all cash should be retained       
 + Debt              1,694          (1,434)                260  per M&A call gross debt $260mm           
 + Pension & OPRB                 245                  245                
                       
 TEV (ex. Pension & OPRB)   $        2,559    $        1,216                
 TEV (incl. Pension & OPRB)   $        2,804    $        1,462                
                       
   Good   Better   Best                 
 PF TEV (ex. Pension & OPRB)   $        1,216  $        1,216  $        1,216                
 PF TEV (incl. Pension & OPRB)   $        1,462  $        1,462  $        1,462                
                       
 Non-Core Assets                       
 Oahu Land (18,260 acres)                 195                205                215  $217.3mm asking price   (http://www.cbre.us/o/baltimore/properties/oahu-land/pages/overview.aspx)   
 Other "Non-Core" Hawaii Land   (~6,740 acres)                    67                   71                   74  est at $10-11k/acre; p. 4 of M&A pres   says 25k non-core Hawaii acres in total     
 Land at 1 Dole Dr., Westlake Village, CA   (Corp HQ)                    15                   23                   30  30 acres of property, value at   $0.5-1.0mm/acre (http://goo.gl/maps/JntCS)       
 Building at 1 Dole Dr., Westlake Village, CA   (Corp HQ)                    65                100                150  169k sf, $65mm cost to build in 1999   (http://assessormap.co.la.ca.us/mapping/viewer.asp)     
 Land at 2 Dole Dr. (Four Seasons/Wellness   Center/Spa)                    10                   15                   20  20 acres of property, value at   $0.5-1.0mm/acre (http://goo.gl/maps/JntCS)       
 Buildings at 2 Dole Dr. (Four   Seasons/Wellness Center/Spa)                       -                  100                200  20 acres, $81mm cost to build ex. land,   improvements alone assessed at $159mm     
 Bombardier Global Express                    15                   20                   25  http://registry.faa.gov/aircraftinquiry/NNum_Results.aspx?NNumbertxt=N85D     
 Other "Non-Core" Assets                 200                200                200  this is a guess, includes 88k owned acres   ex. Hawaii, housing compounds, research facilities, schools and   hospitals 
    Total                 567                733                914  "Over $500mm FMV of non-core assets   (e.g. idle land)" - p. 10 of M&A presentation     
                       
 Excess Working Capital                       -                     50                100  Up to $200mm per M&A call Q&A           
                       
 PF Adjusted TEV (ex. Pension)                 649                433                202                
 PF Adjusted TEV (incl. Pension)                 894                678                447                
                       
 2013 EBITDA                 150                160                170  Mgt guidance, calls this "trough"   earnings in M&A call         
 + Cost Savings                    50                   50                   50  Hard cost savings (largely corporate o/h)   per mgt guidance, to be fully run-rated late 2013     
 2013 PF EBITDA   $              200  $              210  $              220                
                       
 Normalized Capex                    70                   70                   70  Per Q4 conf call 60-70 range; $100mm 2013   strategic capex funded from TL & CFO per Q4 conf call   
 2013 PF EBITDA - Norm. Capex   $              130  $              140  $              150                
                       
 PF Adjusted TEV (incl. Pension) / 2013 PF   EBITDA  4.5x 3.2x 2.0x                
 PF Adjusted TEV (incl. Pension) / (2013 PF   EBITDA - Norm. Capex)  6.9x 4.8x 3.0x                
                       
Valuation                      
 2013 PF EBITDA - Norm. Capex   $            140  $            140  $            140                
 Multiple  10.0x 11.0x 12.0x  8-10% unlevered FCF yield             
 TEV   $        1,400  $        1,540  $        1,680                
                       
 - Debt               (260)              (260)              (260)                
 - Pension & OPRB               (245)              (245)              (245)                
 + Cash                       -                        -                        -    Very conservative, likely $90mm+ of cash              
 + Non-Core Assets                 500                600                700  Let's be conservative             
                       
 Equity Value              1,395             1,635             1,875                
 Shares Outstanding                89.2               89.2               89.2                
 Value/Share   $          15.63  $          18.33  $          21.02                
                       

 

David Murdock

Key Risks

  • Management is wrong and these are not trough earnings
  • Poor capital allocation, use of proceeds from asset sales
  • Asset sales are not realized
  • Murdock does not seek to maximize asset value
  • Company is taken private at a substantial discount to FMV
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Closing of Asia sale transaction on Monday, April 1st
  • Large share repurchase
  • Large dividend recap
  • Investor awareness of hidden assets
  • Asset sales
  • Forced buying to close short positions – 9.0mm shares are currently sold short, presumably relating to capital structure arb trades that will be unwound post Asia sale closing
  • LBO or sale to strategic buyer
    sort by   Expand all   New post

    Description

    DOLE is not just a fruit and vegetable company.  DOLE is a real estate and hard asset company with a fruit and vegetable operation attached to it.  Investors are dramatically underestimating the incredible breadth and value of DOLE’s non-core assets (it’s not just farmland!), causing DOLE shares to trade at a severely depressed multiple of what management has stated are trough earnings.  On Monday, DOLE will close on the sale of its Asian businesses for $1.7 billion, allowing the company to retire virtually all of its debt, creating a dirt cheap stub trading at 3-4x PF EBITDA that is begging to be re-levered for a large special dividend or share buyback and/or taken private.  I estimate fair market value for DOLE shares is at least 50-100% higher than the current price, with a large margin of safety and even greater potential upside based on performance, financial engineering and likely underestimated hidden asset value.

    Key Non-Core Assets

    Notes on Pro Forma Valuation

    The Math

     ($MM)                       
       Current   Adj   PF                 
     Stock Price   $        10.72    $        10.72                
     Shares Outstanding                89.2                 89.2                
     Equity Value              956.2               956.2                
                           
     - Cash                 (92)                   92                      -    assume $0 cash for conservatism; all cash should be retained       
     + Debt              1,694          (1,434)                260  per M&A call gross debt $260mm           
     + Pension & OPRB                 245                  245                
                           
     TEV (ex. Pension & OPRB)   $        2,559    $        1,216                
     TEV (incl. Pension & OPRB)   $        2,804    $        1,462                
                           
       Good   Better   Best                 
     PF TEV (ex. Pension & OPRB)   $        1,216  $        1,216  $        1,216                
     PF TEV (incl. Pension & OPRB)   $        1,462  $        1,462  $        1,462                
                           
     Non-Core Assets                       
     Oahu Land (18,260 acres)                 195                205                215  $217.3mm asking price   (http://www.cbre.us/o/baltimore/properties/oahu-land/pages/overview.aspx)   
     Other "Non-Core" Hawaii Land   (~6,740 acres)                    67                   71                   74  est at $10-11k/acre; p. 4 of M&A pres   says 25k non-core Hawaii acres in total     
     Land at 1 Dole Dr., Westlake Village, CA   (Corp HQ)                    15                   23                   30  30 acres of property, value at   $0.5-1.0mm/acre (http://goo.gl/maps/JntCS)       
     Building at 1 Dole Dr., Westlake Village, CA   (Corp HQ)                    65                100                150  169k sf, $65mm cost to build in 1999   (http://assessormap.co.la.ca.us/mapping/viewer.asp)     
     Land at 2 Dole Dr. (Four Seasons/Wellness   Center/Spa)                    10                   15                   20  20 acres of property, value at   $0.5-1.0mm/acre (http://goo.gl/maps/JntCS)       
     Buildings at 2 Dole Dr. (Four   Seasons/Wellness Center/Spa)                       -                  100                200  20 acres, $81mm cost to build ex. land,   improvements alone assessed at $159mm     
     Bombardier Global Express                    15                   20                   25  http://registry.faa.gov/aircraftinquiry/NNum_Results.aspx?NNumbertxt=N85D     
     Other "Non-Core" Assets                 200                200                200  this is a guess, includes 88k owned acres   ex. Hawaii, housing compounds, research facilities, schools and   hospitals 
        Total                 567                733                914  "Over $500mm FMV of non-core assets   (e.g. idle land)" - p. 10 of M&A presentation     
                           
     Excess Working Capital                       -                     50                100  Up to $200mm per M&A call Q&A           
                           
     PF Adjusted TEV (ex. Pension)                 649                433                202                
     PF Adjusted TEV (incl. Pension)                 894                678                447                
                           
     2013 EBITDA                 150                160                170  Mgt guidance, calls this "trough"   earnings in M&A call         
     + Cost Savings                    50                   50                   50  Hard cost savings (largely corporate o/h)   per mgt guidance, to be fully run-rated late 2013     
     2013 PF EBITDA   $              200  $              210  $              220                
                           
     Normalized Capex                    70                   70                   70  Per Q4 conf call 60-70 range; $100mm 2013   strategic capex funded from TL & CFO per Q4 conf call   
     2013 PF EBITDA - Norm. Capex   $              130  $              140  $              150                
                           
     PF Adjusted TEV (incl. Pension) / 2013 PF   EBITDA  4.5x 3.2x 2.0x                
     PF Adjusted TEV (incl. Pension) / (2013 PF   EBITDA - Norm. Capex)  6.9x 4.8x 3.0x                
                           
    Valuation                      
     2013 PF EBITDA - Norm. Capex   $            140  $            140  $            140                
     Multiple  10.0x 11.0x 12.0x  8-10% unlevered FCF yield             
     TEV   $        1,400  $        1,540  $        1,680                
                           
     - Debt               (260)              (260)              (260)                
     - Pension & OPRB               (245)              (245)              (245)                
     + Cash                       -                        -                        -    Very conservative, likely $90mm+ of cash              
     + Non-Core Assets                 500                600                700  Let's be conservative             
                           
     Equity Value              1,395             1,635             1,875                
     Shares Outstanding                89.2               89.2               89.2                
     Value/Share   $          15.63  $          18.33  $          21.02                
                           

     

    David Murdock

    Key Risks

    • Management is wrong and these are not trough earnings
    • Poor capital allocation, use of proceeds from asset sales
    • Asset sales are not realized
    • Murdock does not seek to maximize asset value
    • Company is taken private at a substantial discount to FMV
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectDisclaimer
    Entry03/28/2013 01:11 PM
    Membercuyler1903
    Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.

    Subjectquestions
    Entry03/28/2013 01:35 PM
    Memberlordbeaverbrook
    thanks for the idea.  two questions:
     
    1) for valuing operations, you use an 8-10% unlevered FCF yield.  however, it looks like you haven't taken anything out for taxes... are they not paying income taxes?
     
    2) you mentioned that this is trough earnings... is that just for the banana business or for the entire business?
     
    thanks
     

    SubjectHidden Assets bullets
    Entry03/28/2013 01:38 PM
    Membercuyler1903
    Sorry for the poor formatting of the Key Non-Core Assets bullets, but when you're reading make sure you note that sub-bullets are in many cases separate hidden assets.
     
    - Hawaii land for sale
    - Other non-core Hawaii land
    - 1 Dole Dr.
    - 2 Dole Dr.
    - Bombardier Global Express jet
    - Latin American offices
    - Sweden offices
     
    Thanks,
    Cuyler

    Subjectcore business
    Entry04/01/2013 04:07 PM
    Memberjuice835
    thanks for the interesting idea and active Q&A. it seems that this investment is likely to really work if the issues facing the core bus for several years reverse-- to that end, is your thesis that the persistent downtrend in EBITDA of the last few years caused by competitive dynamics and supply issues IS actually likely to reverse or is this just a cheap option on an ok business that isn't likely to get too much worse with a smart capital allocator (nothing wrong with that)?

    SubjectMgmt makes $12 buyout offer
    Entry06/11/2013 07:28 AM
    Memberstraw1023
    First, another good idea from cuyler even though it did not play out exactly as expected. The value was there. Always difficult to figure out how mgmt plays it in situations like this.
     
    I imagine that, in retrospect (hindsight is 20/20), the suspension of shr buyback was indication that something was in the wings.
     
    Any thoughts on chance that buyout happens at >$12? Is $12 start of negotiation or the final offer?
     
     

    SubjectRE: RE: Mgmt makes $12 buyout offer
    Entry06/11/2013 05:38 PM
    Memberstraw1023
    alas, I did not make money. I could never get comfortable with Murdock. I agree very much with your analysis throughout, and i do not think you erred at all . . . except in hindsight. 
     
    This morning, I was wondering about a higher negotiated deal, but also think significant chance murdock walks away so not a layup even at $12 . . . and not attractive at $12.50. alas, missed the move from $12 to $12.50 as well.

    SubjectDOLE CVR
    Entry06/17/2013 08:54 AM
    MemberValueGuy
    Murdock should offer to spin the $5.56 of non-core assets into a contingent value right (CVR), and bump his cash price as well. In this way, shareholders can be assured they are getting the best value for both core and non-core assets.  The new deal consideration would be say $13.75 of cash and 1 CVR.

    SubjectRE: DOLE CVR
    Entry06/17/2013 09:23 AM
    Membertyler939
    Given the recent history, is there any reason to believe this will happen, or is this just what would be "fair" in a world where management cared about doing the right thing?

    SubjectRE: DOLE CVR
    Entry06/17/2013 11:37 AM
    Memberpcm983
    can you send me the sheet on math of your CVR proposal? thanks

    SubjectRE: RE: DOLE CVR
    Entry08/12/2013 10:50 AM
    MemberValueGuy
    It would be fair in an ideal world - but we know that the idea of the CVR is in the public domain and so it's likely the special committee has seen it

    SubjectCEO Murdock bumps to $13.50!
    Entry08/12/2013 10:51 AM
    MemberValueGuy

    Murdock raised his bid to $13.50 all cash and he and the company have signed a definitive merger agreement as of today! That's 12.5% above the initial $12.00 offer and 32.4% above the 6/10/13 pre-deal share price of $10.20. In the absence of another bidder I would see the deal closing in the November timeframe, based on the timing around SEC clearance of a definitive proxy and a majority of the minority shareholder vote.

    Lazard will now spend 30 days shopping the company, so potential exists for one or more new bidders.

    Link to press release:
    http://investors.dole.com/phoenix.zhtml?c=231558&p=irol-newsArticle&ID=1846859&highlight=


    SubjectGo shop expires Sept. 12th; other bidders in proxy
    Entry08/21/2013 01:24 PM
    MemberValueGuy

    Based on the preliminary proxy filed today it appears that the go-shop period will end on September 12th. As of August 16th, interested parties had executed confidentiality agreements and were granted access to an online datasite to commence diligence. The proxy discusses prospective bidders (particularly Party B and Party C) and the stock is now trading through the $13.50 deal price.  Companies are taking a close look at DOLE and that is good for shareholders. Murdock has run his play book from 2003 all over again, but the endgame here may look very different thanks to one stubborn fact....

    Remember: 41% ($5.56/share) of the current agreed acquisition price ($13.50/share) consists of assets that can be sold without affecting the earnings power of DOLE. I continue to like DOLE here because we pay 20c (i.e. $13.70 last trade - $13.50 offer price) to get exposure to $5.56 of potential upside.

    For those with further interest, I'd recommend a close reading of the background of the transaction section of the proxy: http://www.sec.gov/Archives/edgar/data/18169/000119312513341344/d587864dprem14a.htm


    SubjectRE: RE: Go shop expires Sept. 12th;
    Entry08/26/2013 08:42 PM
    MemberValueGuy
    Hi rh121 - thanks for your question!
    From the proxy it seems that other bidders have so far not been dissuaded by his large stake.
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