Preface: On May 9, according to Bloomberg News, Zong Qinghou, chairman of Hangzhou Wahaha Group, is considering acquiring large foreign companies. Zong stated that the company is in negotiations with U.S. dairy company Dean Foods, but did not disclose details. Since then, the news of Wahaha's acquisition of the U.S. dairy company has been confirmed, but what exactly is Dean Foods?

| A Dairy Giant with Liquid Milk Accounting for Over 70% of Revenue

As the largest producer and supplier of liquid milk in the United States, Dean Foods' product line includes plain milk, flavored milk, ice cream, fermented dairy products, and dairy beverages, with more than 50 local or regional brands.

In 2015, Dean Foods' total revenue reached $8.1 billion, with liquid milk accounting for 71%. It can be said that liquid milk holds an absolutely important position in Dean Foods.

From a brand perspective, company brands and private labels are almost evenly split, each accounting for around 50%.

According to the 2016 Global Dairy Top 20 list released by Rabobank in July, Dean Foods ranked tenth, down one place from 2015, and was surpassed by Chinese dairy company Yili. Its revenue was only $100 million more than another Chinese dairy company, Mengniu. As a global top ten dairy company, Dean Foods is certainly a dairy giant, but its declining ranking also reflects its recent downturn.

In terms of revenue, Dean Foods is almost at the same level as Mengniu, but their current market capitalizations differ greatly. Based on the closing price on November 1, 2016, Mengniu, listed on the Hong Kong Stock Exchange, had a market value of approximately HK$57.5 billion (about $7.4 billion). Even after a 12% rise due to acquisition rumors, Dean Foods' market value was only $1.65 billion. At first glance, Dean Foods, with slightly higher annual revenue, has a market value only 22% of Mengniu's. If Wahaha successfully acquires it, it seems like a bargain. However, is that really the case?

| Declining Revenue and Consecutive Losses: Dean Foods Is Not Cheap

Although Dean Foods appears cheap from the perspective of market value and revenue, considering other indicators might lead to the opposite conclusion.

Against the backdrop of global oversupply in dairy products, Dean Foods' annual sales have fallen from $13 billion in 2011 to $8.1 billion in 2015, a cumulative decline of nearly 38%. Worse, in the last two fiscal years (2014/2015), Dean Foods recorded losses: $20 million in 2014 and $9 million in 2015. Although fiscal 2013 seemed profitable, a closer analysis shows that profits mainly came from other income and income from discontinued operations, not from core business, making such earnings unsustainable.

Since 2016, Dean Foods' downward trend has become more pronounced. Despite still being one of the global top ten dairy companies, such poor performance and expectations naturally fail to attract capital market favor.

However, if Wahaha does acquire Dean Foods, there are still strategic advantages. According to BCG's latest report, over the next five years, emerging markets will contribute 75% of global dairy industry growth (in terms of consumption volume). China itself will contribute 55% of industry growth. Although the dairy industry is booming in emerging markets led by China, most of the potential in these markets remains untapped, with limited transportation, distribution, and retail systems. Overall, consumer awareness also needs improvement.

According to BCG's forecast, over 40% of global dairy market growth in the next five years will come from China. Dean Foods currently has almost no business in China. After Wahaha's split with Danone, its dairy product line has lacked highlights. If Dean Foods can establish a foothold in China after the acquisition, it would create a win-win situation.