Dole Food Spinoff Likely to Boost Market Value : Real estate: The firm is selling 17% of its Castle & Cooke Homes unit to the public. The deal may boost Chairman David Murdock’s stake by $37 million.

“Creating shareholder value” is one of those business catch-phrases that are used often--and often misunderstood. But to see how it’s actually created, take a look at billionaire David H. Murdock’s latest plans.

Murdock is the tight-lipped chairman and biggest stockholder of Dole Food Co., the big fruit, vegetable and real estate concern based in Westlake Village. He’s currently planning to spin off 17% of Dole’s home-building operation to the public in an initial stock offering.

The sale of shares in the new company, Castle & Cooke Homes Inc. (CCH), is expected to raise about $90 million in gross proceeds. The remaining 83% stake in CCH would be retained by Dole, and Dole also would retain its commercial development, resort operations and fruit business.

CCH mainly builds houses in Bakersfield and on the island of Oahu in Hawaii. In 1991, the company sold 643 houses (average price $266,000) and 230 home sites, and generated revenue of $186.2 million. Its biggest development in Oahu is Mililani Town, a 3,500-acre master planned community where Dole has sold more than 10,000 houses since breaking ground 25 years ago.

In Bakersfield, CCH claims to be the city’s biggest residential developer, with more than 900 houses sold to date. The company also has developments in Camarillo and in Sierra Vista, Ariz.

Why bother with the spinoff? Besides raising cash for CCH and Dole, the sale puts a specific price tag on Dole’s home-building business, a value that’s likely to be much higher than is reflected in Dole’s current stock price.

Consider: The market value of Dole’s total stock outstanding is currently $1.9 billion, based on Dole’s closing price Monday of $31.88 a share in New York Stock Exchange composite trading.

According to CCH’s stock-registration filing with the Securities and Exchange Commission, CCH accounts for about 6% of Dole’s total sales, which were $3.2 billion in 1991. So, it could be said that Wall Street currently puts a value on the home-building unit of $114 million (6% of $1.9 billion).

But if investors pay $18 a share for CCH’s new stock--the price Dole hopes to get--it would place a total market valuation on CCH’s shares of $540 million, or nearly five times higher.

One might argue that CCH’s existing value (as reflected in Dole’s stock price) is actually richer because CCH, while contributing only 6% of Dole’s sales, threw off 20% of Dole’s profit in 1991. But even 20% of Dole’s $1.9-billion market value is $380 million, still far short of what CCH would be worth once its stock trades separately.

And Murdock stands to benefit more than anyone.

Murdock, 69, currently owns 23% of Dole, with his stake carrying a market value of $438 million. Again, assume that CCH’s new market value will be $540 million--or $160 million more than the $380 million value ascribed to CCH’s 20% contribution to Dole’s 1992 profit. Murdock’s 23% interest in that $160-million increase in “shareholder value” is a tidy $37 million.

Clearly some of these figures are assumptions. But the point is that Dole’s home-building unit will be worth a lot more as a separate entity than it would be remaining wholly owned by Dole.

CCH “is a business that the investor currently doesn’t pay a whole lot for in Dole’s stock,” said Ronald B. Morrow, who follows Dole for the investment firm Smith Barney, Harris Upham & Co. in New York. “By spinning it off, it will create a separate value.”

Moreover, CCH’s new valuation after it goes public would boost Dole’s overall value, because suddenly its 83% stake in CCH would be worth millions of dollars more than is currently reflected in Dole’s stock price.

“One of the reasons people invest in Dole is they think there’s a lot of value in the real-estate side that’s not recognized by the stock market,” said Craig Silvers, an analyst with Crowell, Weedon & Co. in Los Angeles. “This is one way to put a number on the value of their real estate.”

While CCH’s new public stockholders will get that valuation, much of their cash will be going back to Dole, according to CCH’s filing with the SEC. (Murdock and other Dole/CCH executives declined comment on the offering, citing the SEC’s “quiet period” while a stock sale is pending.)

The filing says $34 million of the sale’s proceeds would be used to pay back debts that CCH owes Dole, which was known as Castle & Cooke Inc. when Murdock took control of the company in 1985.

Plus, CCH plans to pay an unspecified sum back to its banks to help repay $80 million that CCH has drawn on a $90-million line of credit provided by the banks. CCH used that loan last year to help pay a special $67-million dividend to Dole.

Why was the dividend paid? The filing doesn’t say, and the executives won’t explain, either. Regardless, investors who buy into CCH’s initial stock sale will indirectly help finance that dividend.

Which begs another question: If most if not all of that cash is going back to Dole, how much of the public’s money will go toward CCH’s own working capital and growth effort? The SEC filing doesn’t clarify that, either, although it’s likely that if CCH uses, say, $50 million of the proceeds to reduce its bank debt, that same $50 million credit will now then be available to CCH for its future expansion.

The filing also shows that CCH’s business has held steady in recent years despite the slump in real-estate markets and Dole’s own problems with its fruit and vegetable lines during 1992. Dole overall expects a sizable drop in 1992 operating earnings, largely because of slumping banana prices.

CCH’s profit in 1991 was $26.6 million, meaning it earned 14 cents per dollar of sales, a remarkable margin given the weak real estate market. The profit margin of the big California home builder Kaufman & Broad Home Corp. was a mere 2.2% in 1991, and the average margin of the publicly held builders followed by the research firm Value Line Investment Survey was only 2.5%.

But CCH’s performance flattened a bit last year. In the nine months ended Oct. 5, its profit was $17.4 million, down 2% from a year earlier, while sales fell 12%, to $129.6 million.

And the company’s bid to grow again will get tested in 1993.

Kaufman & Broad is invading CCH’s turf in Bakersfield with plans to start selling houses there “probably later this spring some time,” said Kaufman & Broad spokesman Bernard Sandalow. “The fact that there’s already other builders in a market doesn’t encourage or deter us.”