Looking at the Dole Food IPO

The market for initial public offerings (IPOs) is going to get a big test when Dole Food jumps on to the publicly-traded market.

Dole recently filed for a $500 million offering. The offering is being underwritten by a team led by Goldman Sachs, Merrill Lynch (now part of BofA), Wells Fargo and Deutsche Bank. Dole has applied to the New York Stock Exchange for the ticker symbol DOLE.

Actually, this isn’t Dole’s debut on the public markets. The stock had been on the exchange, but in 2003 Dole’s CEO, David Murdock, decided to buy the company out all by himself. He bought every single share, and today Murdock is the one-and-only shareholder.

That was certainly a gutsy move, but the problem is that Murdock financed the buyout with a ton of borrowed money, and Dole continues to carry that anchor on its books. Not surprisingly, the huge debt load is part of the reason why Dole is crawling back to the public market. Make no mistake — Dole will be the first of many companies to come back to the stock market after they thought they had kissed it goodbye for good.

As a long time investor, one of things I hate most is seeing a highly profitable company having its operating profits eaten up by interest payments. There are lots of healthy businesses with terrible finances. Today, Dole is weighed down by over $2 billion in debt.

Dole’s Top Priority Is Reducing Its Debt

Since the offering will be used to pay down debt, this will help Dole’s muddy finances. I was pleased to see that the ratings company Fitch recently removed its "negative" rating on Dole.

Paying down debt is a top priority for Dole. The company recently sold 2,000 acres in Hawaii for about $39 million, as well as its flowers division. Dole also said it plans to sell off some properties in Latin America in order to pay down its debt.

Dole bills itself as "the world’s largest producer and marketer of high-quality fresh fruit and fresh vegetables, and is the leading producer of organic bananas." If you’re not familiar with Dole, the company has a rather colorful history. It has played a very important role in Hawaii’s colonial history including helping to overthrow Hawaii’s last queen in 1893. In fact, the first president of the Republic of Hawaii was Sanford Dole who was the cousin of James Dole, the founder of the Hawaiian Pineapple Company which was the antecedent of Dole Food.

Let’s look at some of the numbers. For the first half of this year, Dole’s EBITDA (earnings before interest, taxes and depreciation) was $266 million. That’s a nice increase over the $233 million for the same period in 2008. The rise is also impressive when you consider that Dole’s sales dropped by 11%. The company said that the cash flow it generated from operations jumped in the second quarter to $170 million from just $60 million for the same period last year. In 2008, Dole had revenues of $7.6 billion.

Here’s My Take

Dole has only applied for an offering, so we don’t know yet exactly when the IPO will take place. My advice is to skip the IPO and instead watch how the company manages itself. My fear is that Dole’s heavy debt burden may be too much to bear. The company could soon prove itself a worthy stock to own, but for now, I say don’t buy Dole Food.

After the IPO, be sure to visit Portfolio Grader to see my advice on Dole plus 5,000 other publicly traded stocks.

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