Description

DOLE is not just a fruit and vegetable company.  DOLE is a real estate and hard asset company with a fruit and vegetable operation attached to it.  Investors are dramatically underestimating the incredible breadth and value of DOLE’s non-core assets (it’s not just farmland!), causing DOLE shares to trade at a severely depressed multiple of what management has stated are trough earnings.  On Monday, DOLE will close on the sale of its Asian businesses for $1.7 billion, allowing the company to retire virtually all of its debt, creating a dirt cheap stub trading at 3-4x PF EBITDA that is begging to be re-levered for a large special dividend or share buyback and/or taken private.  I estimate fair market value for DOLE shares is at least 50-100% higher than the current price, with a large margin of safety and even greater potential upside based on performance, financial engineering and likely underestimated hidden asset value.

Key Non-Core Assets

• Management stated on p. 10 of the M&A presentation that there is “Over $500 million FMV of non-core assets (e.g. idle land)” – this number is likely severely understated given the complex maze of DOLE’s holdings, but we can use that as our base case (I have ignored taxes here as these values are so wide-ranging and tax implications are unknowable, our conservatism should easily outweigh any tax)
• Management seems to have incentive to understate the value of the hidden assets here - Murdock probably wants hidden asset value to be kept as low profile as possible (he may want to buy more DOLE stock or take it private again)
• 18,260 acres of Oahu, Hawaii land currently listed for sale with $217mm asking price
• CBRE offering:  http://www.cbre.us/o/baltimore/properties/oahu-land/pages/overview.aspx
• CBRE price and parcel list:  https://docs.google.com/file/d/0B0xSSQ9VQorNSjdvOHFEVTh4dlU/edit?usp=sharing
• ~6,740 acres of other non-core Hawaii land (p. 4 of M&A presentation states 25k non-core Hawaii acres in total
• 1 Dole Drive, Westlake Village, CA – corporate headquarters
• Sits on 30 acres of owned land in one of the toniest sections of LA County, land likely worth $0.5-1.0mm per acre
• Reported $65mm construction cost for 169k s.f. office building
• Profile of property:  www.tedmeeder.com/files/Download/Dole.pdf
• Dole leases 1,483 s.f. to Laboratory Corporation of America for $115,674 per annum, or $78/sf (per 2007 10-K)
• Applying $78/sf to the entire 169k s.f. building yields $13.2mm of annual rent, at a 7.5% cap rate you get a value in excess of $175mm for this building alone
• 2 Dole Drive, Westlake Village, CA – Four Seasons-Westlake Hotel
• Sits on 20 acres of owned land adjacent to corporate headquarters
• Tenants include Four Seasons-Westlake Hotel, California Health & Longevity Institute (a high-end clinic/hospital), Westlake Wellbeing Properties, LLC and World Championship Sports Network, Inc.
• It is unclear as to what ownership DOLE may have in the various structures on the property, but it appears that it may be significant since p. 10 of the M&A presentation stealthily cited “other” assets including “offices, housing compounds, schools and hospitals.”
• While I think it makes sense to assume that DOLE does not own these buildings, I think it might…  Read here: http://www.hotel-online.com/News/PR2005_2nd/Apr05_DoleSeasons.html)
• Assessed value of improvements alone is $159mm here https://docs.google.com/file/d/0B0xSSQ9VQorNTFFRZFJyV1NnRkU/edit?usp=sharing
• “Heavy Iron” – Bombardier Global Express – Tail #N85D (http://registry.faa.gov/aircraftinquiry/NNum_Results.aspx?NNumbertxt=N85D)
• Estimated value range of $15-25mm for this plane
• Owned Latin American offices in San Jose, Costa Rica and La Ceiba, value unknown
• Owned European regional offices in Sweden, value unknown

Notes on Pro Forma Valuation

• 2013 Pro Forma EBITDA guidance of $150-170mm, which increases to $200-220mm after inclusion of $50mm of cost savings, use Q4 conference call presentation and transcript
• Management calls this “trough” earnings on the M&A call:  “I think it's fair to say that we believe the banana business is in a trough right now. It's been affected, obviously, by the European economy. We're not sure what the length or duration of that trough is. But certainly, if you go back, as you said very well, if you look at historically, our earnings have been higher than they are today, and we would expect some recovery at some point in time. We do believe that we have a very strong banana business.”
• Cost savings to be fully run-rated by end of 2013; these are hard cost savings, the majority of which management said will come out of corporate
• Expecting all debt to be retired, with new term loan in the amount of ~$260mm in place at closing – this is the anticipated gross debt level, although my math very conservatively assumes the $91mm of cash goes away and $260 is the net debt level
• One-time “strategic” capex need relating to farm rejuvenation and fleet enhancements will be covered by cash from operations and the term loan, per management
• Normalized ongoing capex of $60-70mm per management
• Pro forma cash interest expense of $16mm (~6% rate), cash taxes of $7-10mm (~20% rate) and annual pension contributions of $18mm, all per management
• Potential for substantial excess working capital to be pulled out of business post-closing, per Q&A on M&A call, I have assumed this is $0 in my calculation at the bottom

The Math

David Murdock

• 88 years old, owns 40% of DOLE shares
• Murdock bought $60mm worth of DOLE shares in the open market in July and August at prices up to $12.50 per share, stopping shortly before the 9/17/12 announcement of the Asia business
• Some investors mistakenly think Murdock “sold” DOLE shares in November 2012, but this disposition was related to the 2009 “MACES Trust” placement to institutional investors – this was not an open market sale and was not discretionary
• For more on Murdock, watch this:  http://losangeles.cbslocal.com/2012/12/23/dole-foods-owne-90-discusses-his-inspiration-for-calif-health-and-longevity-institute/

Catalyst

• Closing of Asia sale transaction on Monday, April 1^st
• Large share repurchase
• Large dividend recap
• Investor awareness of hidden assets
• Asset sales
• Forced buying to close short positions – 9.0mm shares are currently sold short, presumably relating to capital structure arb trades that will be unwound post Asia sale closing
• LBO or sale to strategic buyer