On April 3, a bankruptcy court said it would approve the sale of most of Dean Foods' assets to Dairy Farmers of America, but the fight to close the deal isn't over yet.
Antitrust concerns have plagued the bankrupt milk giant and its top bidder for months, and DFA and Dean still need the U.S. Department of Justice to sign off for the sale to go through. Some farmers, stakeholders and shareholders told Food Dive that they are hoping that roadblock will stop the deal, claiming the sale would negatively impact prices and competition.
"If it continues on the path it is on, it's a death knell for the independent family farm in the United States," dairy farmer Jonathan Haar told Food Dive.
Dean Foods is the largest milk processor in the U.S. with 57 manufacturing facilities and a portfolio of brands, including TruMoo and DairyPure, and the milk giant is the DFA's biggest customer. Both have faced antitrust lawsuits in the past.
Facing objections by farmers and shareholders over these concerns, DFA and Dean dropped its $425 million deal with DFA as stalking-horse bidder. But that didn't stop the co-op from landing the top bid to purchase 44 of the company's fluid and frozen facilities for $433 million this month. Dean has said it wants to finalize its bankruptcy sale by early May, but that is pending regulatory approval.
As antitrust concerns continue to build, will Dean secure the Justice Department's coveted signoff to offload the majority of its assets to Dairy Farmers of America or could there be more hurdles?
Justice Department oversight
Federal antitrust regulators have reportedly been probing the potential agreement between DFA and Dean Foods for months.
The antitrust division of the Justice Department wrote to Dean's unsecured creditors on March 11 that a deal with DFA "appears to pose a serious risk of anticompetitive harm." The department also wrote that "DFA has shown little willingness to engage or fully acknowledge the significant antitrust concerns posed by this transaction."
The department filed a limited objection before the court approved the deal, asking the bankruptcy judge to ensure the sale doesn't affect "non-bankruptcy laws." DOJ declined Food Dive's request to comment.
Anne Divjak, vice president of government relations and external communications at Dean Foods, told Food Dive in an email the company has been engaging with DOJ for months concerning a potential deal with DFA. She said Dean provided documents and detailed data in response to the agency's requests, and the department has been in contact with various third parties, including farmers and processors, about the transaction and competition in the industry.
"Dean Foods believes that the pending agreement with DFA is procompetitive and beneficial to both farmers and consumers," she said. "We remain committed to completing the transaction as quickly as possible and to ensuring a smooth transition for our employees, our customers, and our suppliers."
Monica Massey, executive vice president and chief of staff for DFA, told Food Dive in an email that DFA has also had ongoing communication with the DOJ and will continue to cooperate with officials.
"While we are the nation’s largest dairy cooperative, it’s important to note that we are made up of mostly small farms," Massey said. "Across the United States, dairy producers can choose among a number of cooperatives to market their milk or choose not to join a cooperative and market their milk directly to buyers. In many areas of the U.S., we are not the largest marketer of milk in the region."
But it's not just the approval Dean and DFA need to worry about. Both parties agreed to include language in the sales contract that would leave room for some grocery chains or dairy groups to file claims against the acquisition, Politico reported.
What this deal could mean for milk
When Dean Foods filed for Chapter 11 bankruptcy protection in November, the company was already in talks with DFA for a sale. But the news that Dean Foods was in "advanced discussions" drew quick concern and criticism from farmers.
Anthony Pahnke, vice president of Family Farm Defenders, told Food Dive that DFA has a long history of questionable practices with price-fixing. Family Farm Defenders are among the stakeholders that reached out to lawmakers and attorney general offices in dairy-producing states to look into the sale.
"A lot of our farmer members in our group are very worried given DFA's past practices, in terms of colluding with processors and non co-ops and hurting not just its own members but hurting dairy industry farmers overall," Pahnke said. "We're very concerned with this actor basically getting even bigger."
In 2007, farmers filed a class action lawsuit against Dean Foods, National Dairy Holdings, Dairy Farmers of America and others for breaking antitrust laws. The complaint states that Dean agreed to make DFA farmers its only suppliers for low milk prices. Neither company admitted wrongdoing, but Dean Foods settled for $140 million in 2011 and DFA settled for $168 million in 2013. In 2009, farmers in the northeast filed a similar but separate class action suit. Dean Foods settled for $30 million in 2011 and DFA for $50 million in 2014.
New York-based farmer Jonathan Haar has been involved with several lawsuits against DFA over the years. He told Food Dive that when he and his wife first heard of the bankruptcy sale and talks with DFA, they wanted to write an amicus brief because they've been fighting DFA in federal court for the last nine years.
"We have a lot of insight being dairy farmers, being DFA members and being advocates for our fellow dairy farmers in the federal court system," Haar said. "The problem in America today is that you have a powerful cartel that's running the dairy industry. DFA is the Godfather, and the USDA has written rules to benefit the processors, not the farmers. The USDA has overseen the absolute collapse of the dairy industry in the United States. It's been ongoing, but it's accelerated at this point in time. Collapse is not hyperbolic at all."
The number of dairy cows in the U.S. dropped by roughly 100,000 animals in the last year as dairy farms have shuttered at record highs. Dairy Farmers of America, a co-op with about 14,000 members nationwide, is accustomed to the struggles of the milk industry today. The co-op, formed in 1998, saw its 2018 net sales drop $1 billion from the year before.
"The problem in America today is that you have a powerful cartel that's running the dairy industry. DFA is the Godfather, and the USDA has written rules to benefit the processors, not the farmers. The USDA has overseen the absolute collapse of the dairy industry in the United States."
For decades, fluid milk consumption has been declining while processors have struggled with competition from milk alternatives, innovative startups and private label in more recent years. As debt has built up, both Dean Foods and Borden Dairy filed for bankruptcy in the last few months.
Peter Carstensen, a professor of law emeritus and an antitrust expert at the University of Wisconsin-Madison's Law School, told Food Dive that the deal is not good for dairy farmers or consumers, but is good for the management of DFA and whoever gets to share in the monopoly profits that DFA will reap. If DFA owns the largest single buyer of fluid milk, then he said the co-op has an enormous amount of power that can adversely affect dairy farmers.
"If you control access to most of the fluid milk, you could raise prices to consumers both through your own fluid milk operation, and by raising prices to other buyers," he said. "So this is why it's really, really unfortunate that this is happening this way."
Grocers have also fought the deal. Stop & Shop and Food Lion filed an objection, expressing concern about how the sale would combine the country's biggest processor of fluid milk with the U.S.'s largest raw milk supplier. Milk cooperatives in Maryland, Virginia and California have raised concerns as well.
Questions remain around Dean's equity
Dean Foods reported net losses in seven of its last eight quarters leading up to its bankruptcy, but some shareholders have questioned whether filing for Chapter 11 was warranted.
Attorney Joshua Haar, who is Jonathon Haar's son, filed a motion in bankruptcy court asking the judge to appoint an ad hoc group of equity shareholders to make sure their views were represented. Dean Foods' assets generate more than $5 billion in sales each year and those assets are greater than its liabilities, he wrote.
"Even a conservative calculation evidences that Dean Foods possesses significant value in excess of liabilities," he wrote. "The only question is where that value will be directed ... DFA sees future profitability, which is why it wants Dean's assets."
Dean Foods shareholder Susan Poole told Food Dive the sale will create a "monopoly on milk prices" and is bad for stakeholders, bondholders, farmers, creditors and shareholders. Poole said that she and other shareholders believe there was an effort prior to the Chapter 11 filing where DFA and Dean pre-planned the bankruptcy.
Chapter 11 bankruptcy protection is typically a voluntary filing designed to help struggling businesses restructure their finances. Dean Foods filed Chapter 11 in the Southern District of Texas and received court approval for $850 million in debtor-in-possession financing in November. According to the company's most recent quarterly report when it filed, Dean Foods has over $1.1 billion in long-term debt, which is more than the company has had in the past five years.
But when looking at the financial statements, Poole said bankruptcy was not necessary because the company had liquidity and stockholders' equity. Dean did not have its bond or interest payments due until 2023, Poole said.
"Dairy Farmers of America, basically, I think they were in collusion to have this bankruptcy and it wasn't warranted," she said. "So that's why we're not very happy about it." She said Dean should have just been restructured to pull out DFA as the middleman instead of this sale.
Others have argued for alternatives as well. Pahnke recently wrote an op-ed about how the government should buy Dean Foods.
Will the DOJ intervene?
Fears of monopoly in the dairy industry date back at least 20 years, with DOJ getting involved in different cases over the years. Although it is likely the deal will go through at this point since the court approved it, if the agency raises flags, it could file a complaint in federal court and objectors believe there is a good chance that could happen.
Poole said she was disappointed the bankruptcy judge approved the sale, but wasn't surprised. She said she is hoping DOJ steps in, but is not sure what the extent of the intervention will look like.
Carstensen said DOJ has a mixed history with the dairy industry so it is hard to predict which way the division will end up leaning in this case. "But they've come up to bat several times and abandoned important challenges, so it makes me a little cautious that way," he said.
He said it could also be tough for the DOJ to reject the deal since the bankruptcy court didn't have many other choices. Although it is anti-competitive, if DFA is the only bidder for most of these assets, then there aren't many options, he said. Carstensen said another possibility is that the DOJ could tell DFA that they are going to be so dominant that they will have to agree to some conduct rules for the next five or 10 years about how to use their market power.
The news of this deal also comes as the pandemic rages on, and the fluid milk industry is especially struggling. Shuttered restaurants and foodservice facilities nationwide have led to closed milk processing plants, forcing farmers to curb production and dump thousands of gallons of surplus milk.
Carstensen said that if DFA survives the pandemic since the milk markets have "gone to pieces," then the co-op is going to have a lock on fluid milk and the outlook isn't bright.
"Dairy farming was heading into a crisis and now with a pandemic, it's making things far worse," Carstensen said. "I am expecting that we are going to be seeing a large exit from dairy farming, not only in the smaller farms that have been exiting, but even some of the large ones are going to be bankrupted and closed down. That's my fear for what's going to happen to dairy."