Wait for the Shares to Ripen

David Murdock, the 90-year-old CEO of Dole Food, took a page from his own playbook when he recently offered to buy the 60% of Dole's stock he doesn't already own. If successful, it would be the second time in 10 years that he bought out the fruit and vegetable producer and took it private.

Murdock offered $12 a share for Dole (ticker: DOLE), an 18% premium to the closing price on June 10, the day before the announcement. His bid values the company at $1.5 billion.

The offer has prompted a wave of shareholder discontent, with many calling the price too low. Most investors believe that Murdock will need to raise his price. On Friday, Dole's stock closed at $12.75, 6.3% above the deal price, reflecting this sentiment.

Investors have a precedent to follow in this case. In 2003, under shareholder pressure, Murdock raised his initial bid 13% to complete the deal. It's reasonable to think something similar will happen this time. That will drive the stock higher, but not a lot higher. A second bid from Murdock could come in at as much as $13.50 to $14 a share, which is still likely to undervalue the company. A strategic bidder isn't expected to emerge.

We wrote a positive story about Dole this year ("A Sweet Opportunity," Jan. 28), noting that the famed banana and pineapple grower could be worth double its market value. The shares, then trading at $10.15, have gained 26% since. We think it would be wisest for an investor to hold on to the shares, in the hope of getting a bit more for them. An active trader might take a small profit and keep his or her core stake.

MURDOCK HAS A LONG history with Dole, having controlled the company since 1985. After taking it private in 2003, he brought it public again in 2009, selling 40% of the stock in a $446 million offering priced at $12.50 a share. He became Dole's chairman and largest shareholder with 60% of the stock, which he reduced to 40% last November to pay off a personal loan.

Last September, Dole announced a transformational deal with Itochu (8001.Japan), a Japanese conglomerate, to which it agreed to sell its packaged foods and Asian fruit operation for $1.7 billion. The divestiture, which was completed in April, leaves Dole with its European and American fresh fruit and vegetables businesses, where it has dominant market positions. Dole is the largest banana brand in North America and Japan, and No. 2 in Europe.

The proceeds from the sale were used to pay down debt. Net debt stands at about $440 million, down from $1.5 billion at the end of the March quarter. Murdock became CEO, and Michael Carter, formerly the company's top lawyer, was promoted to president and chief operating officer.

MURDOCK'S LATEST OFFER comes at a time when business has been struggling. In North America, banana pricing has been weak, due to abundant supplies. Dole's strawberry business has also been hurt by poor weather in California.

The conditions have depressed earnings. Last year operating profit from continuing operations fell 25% to $128 million. For the full year, analysts estimate Dole will earn $39 million, or 44 cents a share, on revenue of $4.2 billion.

Dole has provided guidance for 2013 earnings before interest, taxes, depreciation and amortization at the low end of its $150 million to $170 million range. Brett Hundley, who covers the company for BB&T Capital Markets, estimates normalized Ebitda at closer to $200 million.

Dole Food
Recent Price $12.75 52-Week Range $15.19-$8.41 Market Value $1.1 billion Est. 2013 Revenue $4.2 billion Est. 2013 Net Income $39 million Est. 2013 EPS $0.44 Est. 2013 Ebitda $150 million EV/Est. 2013 Ebitda 10.5 Sources: Bloomberg; company reports

In May, Dole's stock came under pressure, after the company said it would suspend its $200 million share buyback program, instead opting to spend $165 million on three new container ships. Management also conceded that its strawberry business was worse off than previously reported. The stock fell 10% over two days to close at $9.99 on May 29.

Murdock's offer values Dole at 10.2 times estimated 2013 Ebitda of $150 million, which appears attractive compared with 8.4 times for peers Chiquita Brands (CQB) and Fresh Del Monte Produce (FDP), but based on normalized Ebitda, it doesn't look so generous.

Dole also owns 108,000 acres of land, including 25,000 acres on the island of Oahu in Hawaii. The company has said its total Hawaiian landholdings are worth $400 million.

BB&T's Hundley thinks the company could be worth as much as $15 a share, but doesn't think Murdock will pay that much. At $15, he believes Murdock would likely walk away from the deal. That could send the shares falling. Murdock's spokesman did not return a call for comment.

Mark Boyar, president of Boyer Asset Management, which owns Dole in its funds, believes Murdock will offer a higher bid, but nothing materially higher. Boyar values Dole at $19 a share. If that's the case, investors would fare best if Murdock's offer was rejected and the company was allowed to let its value ripen over time.