Dean Foods milk in dairy case

Dean Foods ranks as the largest dairy processor in the United States, annually delivering to market about 2.2 billion gallons of milk and other dairy products.

Dean Foods recently filed for Chapter 11 bankruptcy protection. The company is engaged in advanced talks to sell assets to Dairy Farmers of America. But bondholders aren’t convinced that’s a good deal.

At a first-day bankruptcy hearing an attorney for one-third of the company’s bondholders said that while Dean Foods is “focusing exclusively” on merging with the Dairy Farmers of America, the option won’t be “value-maximizing.” The deal may not even be feasible due to antitrust concerns, the attorney told Judge David Jones in U.S. bankruptcy court for the Southern District of Texas in Houston.

Dairy Farmers of America, a national dairy cooperative, provides about 60 percent of the Dean Foods milk. The processor in turn accounts for about 20 percent of the cooperative’s sales.

“We don’t want a quick sale – a fire sale – without a true market check or opportunity for other potential bidders to submit a real proposal,” said Bob Britton, an attorney at Paul, Weiss, Rifkind, Wharton & Garrison LLP, which represents the bondholders.

The bondholder group approached Dean Foods to offer alternatives such as capital to invest in a standalone restructuring plan and alternative financing. But the proposal “made no headway,” Britton said.

The group had enough capital to buy Dean Foods, he said.

Brian Resnick, a lawyer for Dean Foods, said the company is looking forward to working with bondholders.

Dean Foods won approval to access $475 million of the $850 million in debtor-in-possession financing. That approval will enable it to pay employee wages and benefits as well as suppliers and vendors in terms provided on or after Nov. 12.

Dean Foods ranks as the largest dairy processor in the United States, employing about 15,000 people and annually delivering about 2.2 billion gallons of milk and other dairy products. On the company’s list of institutional customers are McDonald’s Corporation, Starbucks Corporation, Target Corporation and others.

Dean Foods has suffered from competition by almond, rice and soy beverages, which have eroded demand for conventional dairy. Retailers have been using milk as a loss leader to attract customers, which has pressured the company’s margins. Losses deepened after the company’s biggest customer, Walmart Inc., built its own milk plant. The company’s bonds, due in 2023, recently slumped to less than 20 cents on the dollar.

Dean Foods has considered selling all or parts of the company among other options to strengthen its balance sheet, according to the bankruptcy-court filing. But it faced an obstacle in its underfunded multi-employer pension plan, for which it might owe more than $700 million. That stymied any hope of out-of-court transactions, the company stated.

With cash running short, managers became concerned about “potentially ruinous customer flight” if the company couldn’t keep milk flowing to 30,000 schools and thousands of coffee shops, fast-food restaurants and grocery stores. That resulted in the decision to file for Chapter 11 protection, Dean Foods said.

Rick Green contributed to this article.