Texas dairy firm's power grows

Associated Press

DALLAS — In less than eight years, a Dallas investor who started without a cow or barn has built the nation's largest dairy processor, drawing the scrutiny of antitrust regulators and the scorn of consumer advocates.

In Hawai'i, Suiza Foods Corp.'s dairy products, including milk, are sold under the Meadow Gold brand. Advertiser library photo

Suiza is the nation's largest dairy processor, and it's about to get a lot bigger.

If regulators approve its $1.5 billion purchase of its closest rival, Dean Foods Co., Suiza would control about one-third of the U.S. market for fluid milk.

Critics say Suiza's ability to consolidate the fragmented dairy industry is costing consumers more money every time they buy milk.

Last week, University of Connecticut researchers said leading supermarkets and dairy processors — singling out market-dominating Suiza — have gouged New England milk consumers by nearly $50 million since 1997. The study hinted that the stores and Suiza raised prices in the hope consumers instead would blame a controversial price-support program designed to keep small dairy farmers in business.

"Suiza is following the approach that the best way to eliminate competition and increase market power is to buy competitors and then dismantle them," Sen. Patrick Leahy, D-Vt., said last week. "They end up with no competitors and tons of market power."

Suiza officials declined to be interviewed. In a conference call with analysts last week, Suiza's chief executive dismissed the Connecticut study as a political sop to supporters of the dairy price-support program.

Suiza's story features a restless investor, a veteran dairy man and a company with an insatiable appetite for devouring small regional dairies.

In the late 1980s, Engles — an Oklahoma native, Yale Law School graduate and young Dallas real estate investor — bought Reddy Ice Co. from what is now the 7-Eleven Corp. and more than doubled its sales in two years through buying other ice makers.

In 1993, Engles was playing golf with Tex Beshears, who had run 7-Eleven's dairy division.

Beshears told Engles that his acquisition strategy could work just as well in the fragmented dairy business. Before the golfers finished nine holes, Engles has said, they were partners.

The duo bought a Puerto Rican dairy in late 1993 and took its name, Suiza, the Spanish word for Swiss.

That marked the beginning of a buying spree that has outlasted Beshears, who retired from the board of directors two years ago.

The company went public in 1996 and hit $1 billion in sales the next year.

Suiza first drew Wall Street's attention when it paid $960 million for Morningstar, another former 7-Eleven unit.

The deal extended Suiza's product line to include International Delight coffee creamers, Lactaid lactose-free milk, Second Nature egg substitute, yogurt and other non-milk products. Morningstar's products account for about 20 percent of Suiza's profits.

The deal gave Suiza the heft to supply today's huge grocery chains, including Kroger Co., Safeway Inc. and Wal-Mart Stores.

They want suppliers with the size and geographic reach to serve their far-flung stores at the lowest possible cost.

In Hawai'i, Suiza's dairy products are sold under the Meadow Gold brand. The company owns the Meadow Gold Dairies in Honolulu and Hilo.

Investors bid up Suiza's shares from an initial $14 to more than $60. But analysts questioned whether the company overstated the benefits of growing through acquisition. When the company fell short of earnings expectations in late 1998, the stock price plunged into the $20s.

An unbowed Engles pushed ahead with acquisitions such as Garelick Farms in the Northeast, Country Fresh in the Midwest, and Land 'O Sun and Southern Foods Group — then the nation's third-largest dairy processor — in the South.

As Suiza added dairies, it often consolidated operations and closed some plants to reduce costs and boost profits. It has proved a winning strategy.

Those earlier acquisitions, however, would pale next to Suiza's latest move: In April, it said it would buy its closest rival, Dean Foods Co. of Franklin Park, Ill. Suiza would take over the Dean Foods name, creating a company with $10 billion in annual sales.

The new company would be based in Dallas — if the merger is approved by antitrust regulators.

Suiza had trouble with regulators during the Clinton administration. In 1999, the Justice Department filed a lawsuit to block Suiza's $86 million acquisition of an Ohio milk producer, claiming it could have led to higher milk prices for some Kentucky schools. Suiza settled the lawsuit by selling a Kentucky dairy.

In Congress, several Democratic senators have proposed legislation that would make food-industry acquisitions more difficult. Leahy, the Vermont senator and senior Democrat on the Agriculture Committee, has asked the Justice Department to investigate Suiza for anti-competitive behavior.

Anticipating the antitrust review, Suiza has offered to turn over six processing plants to the Dairy Farmers of America. The plants are in regions where Suiza and Dean compete head-to-head.

Overall, however, the companies overlap little, and Suiza would acquire Milk Chugs, a popular single serving of milk, dairy brands such as Dean's and Land O' Lakes, and more non-milk products, including Marie's salad dressings and a peck of pickle brands.

"Suiza has always been an acquisitive company, but this could be their best ever," said John McMillin, an analyst with Prudential Securities. "In the food industry, I've never seen a merger fit as well."

If the Dean Foods purchase is approved, Engles, just 44, would be chief executive of the new company and replace Howard Dean, grandson of his company's founder, as chairman when Dean retires in July 2002. Analysts wonder what Engles could do for an encore — there are no other large U.S. processors to buy.

He might look overseas. Last year, Suiza bought 75 percent of Leche Celta, the fourth-largest dairy in Spain.