DOLE - Dole: Sale Of Fresh Vegetables To Chiquita Is A Home Run

Summary

• Dole plc's sale of the Fresh Vegetable division substantially de-risks an already compelling investment by increasing EBITDA and decreasing leverage.
• Adjusted EBITDA increases ~$30 million to $370 just by removing the loss-making division.
• Interest expense should decrease from $60 million to $40 million.
• Before any additional pricing improvements or COGS savings, Dole's forward pro-forma P/FCF ratio is around 5.5x.

In my original writeup of Dole: Poised for a Major Rebound , I believed Dole plc ( DOLE ) would rerate higher once the business normalized from inflationary pressures and free cash flow was used to pay down debt, with any merger synergies and improvement in Fresh Vegetables accelerating this further.

The announced sale of currently negative EBITDA Fresh Vegetables to Chiquita Holdings for $293 million in cash could accelerate this transformation by nearly two years.

Deal Terms

The 6-K filed on 1/31 has Dole plc entering into an agreement with Fresh Express Incorporated, a wholly owned subsidiary of Chiquita Holdings Limited, to sell its fresh vegetables division for approximately $293 million in cash. The sale looks to be straightforward and includes Fresh Express getting to use the Dole brand in North America for all products produced by the business for 2 years.

The business has agricultural operations and four processing plants across the United States and employs more than 3,000 people, and Dole has guided that the net proceeds from the sale are expected to be used for debt reduction.

Fresh Vegetables Historical Performance

From Dole's 2020 F-1 , we see that in its best years, Fresh Vegetables did under $50 million in EBITDA, but was subject to wild swings. It produced losses in 2018 as well before being helped by higher pricing in 2019.

The past two years have been tough, with breakeven EBITDA in 2021 and negative $27.4 million through 3 quarters in 2022, from a combination of impacts such as the salad recall and inflationary pressures.

Bottom Line Impact of Sale

After today's sale, and ignoring any free cash flow from Q4, net debt drops to $811.7 million.

Leverage ratio drops over a full turn to 2.2x! This is now on par with competitor Fresh Del Monte ( FDP ) that trades at more than 2x the earnings multiple that Dole does.

From the latest guidance, adjusted EBITDA increases ~$30 million to $370 just by removing the loss-making division. Interest expense should decrease somewhere in the $20 million range.

Normalized free cash flow could be near $200 million, a P/FCF ratio of around 5.5x. This is before any additional synergies and normalization in the business after COVID, which I think can be substantial for next year.

Conclusion

Today's sale removes a substantial amount of risk from the Dole investment case, as leverage was often cited as the key risk and reason its traded at a substantially lower multiple than FDP. At a forward cash flow multiple a little over 5, I see no reason that Dole cannot double, or more, over the next 12 months.

Even after a solid run since I first recommended Dole plc under $8, it's a bargain, and I'll be looking to add if there is any pullback from today's gains.

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