Exclusive: Dean Foods seeks Morningstar buyer - sources

NEW YORK (Reuters) - Dean Foods Co is seeking a buyer for its Morningstar dairy division, which is expected to fetch more than $1 billion in a sale, according to several people familiar with the matter.

The top U.S. dairy company has hired investment bank Evercore Partners Inc to shop the business to potential buyers and has attracted interest mostly from private equity firms, two of the people said.

Shares of Dean Foods rose 4 percent to $16.02 on the New York Stock Exchange before trading was halted, news pending.

Morningstar, the smallest of Dean Foods' three segments, sells Friendship cottage cheese and private label dairy products such as creamers, ice cream mix and sour cream. It supplies a range of foodservice customers such as restaurant chains.

The private label business has lower margins than the company's branded products, which include Silk soy milk, Horizon Organic dairy products and International Delight coffee creamer products.

The people asked not to be named because the matter is not public. Representatives for Dean Foods declined to comment while Evercore did not immediately return calls seeking comment.

The auction of Morningstar comes as Dean Foods tries to reduce debt. The Dallas, Texas-based company said last month it plans to sell 20 percent of stock in its WhiteWave segment, which sells branded dairy products including organic milk, in an initial public offering valued at up to $300 million.

The company plans to use the proceeds to reduce outstanding debt at Dean Foods.

Morningstar's net sales totaled $1.3 billion in 2011, roughly 10 percent of the company's overall sales last year.

Selling milk is a low-margin business, since costs are dependent on a range of volatile commodities from fuel to dairy. Passing on those costs to consumers is not easy, since there is little brand loyalty and consumers often just choose the cheapest brand.

In 2011, the company took a $1.9 billion charge to write down goodwill in the dairy business, which it had built up through acquisitions over the years. Falling demand and prices over several years had hurt the value of that business.

Dean Foods has improved its business recently, after cutting costs and working to offset weakened demand at its core fresh dairy business.

(Reporting by Soyoung Kim in New York, additional reporting by Martinne Geller; Editing by Gerald E. McCormick and Carol Bishopric)