* No buyer found, but sources say private equity is interested
* Dean shares close up 5.5 pct
By Soyoung Kim and Martinne Geller
NEW YORK, Sept 26 (Reuters) - Dean Foods Co confirmed on Wednesday that it is weighing a sale of its Morningstar division, in a deal that could be worth more than $1 billion and lead to a break-up of the largest dairy company in the United States.
The company said it recently decided to explore a transaction for Morningstar, the smallest of its three segments, as part of its goal to maximize shareholder value, confirming a Reuters report earlier on Wednesday that cited unnamed sources.
The company's stock closed up 5.5 percent on the New York Stock Exchange on Wednesday and was up 81 percent from a year ago.
"We have not yet identified a buyer for Morningstar, but we know this business possesses an attractive portfolio in a growing marketplace and a top-notch management team," Dean said in a statement.
"That said, we will only sell this business if we can do so in a transaction that maximizes shareholder value and ensures the future success of the business," the company added.
The company has hired investment bank Evercore Partners Inc to shop the business to potential buyers and has attracted interest mostly from private equity firms, people familiar with the matter said before the company made its announcement. The sale could fetch more than $1 billion, the people said.
Evercore did not respond to requests for comment.
A separation of Dean Foods would come after similar moves by Fortune Brands and Sara Lee. Kraft Foods Inc will spin off its North American grocery business next week and change its name to Mondelez International.
Given last month's announcement that Dean is spinning off its WhiteWave segment, Wednesday's news was not surprising, Stephens Inc analyst Farha Aslam said.
"Dean as a company is right now exploring strategic alternatives to unlock value. So the fact that they're exploring this opportunity makes sense to us," Aslam said, calling Morningstar an attractive business. "It has very solid cash flow."
Dean said it planned to sell 20 percent of WhiteWave in an initial public offering expected to raise some $300 million, and then distribute the rest to shareholders. It plans to use proceeds of the IPO to reduce debt.
Morningstar 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.
Stifel Nicolaus analyst Christopher Growe said it was "curious" that Dean is looking to sell Morningstar now, since milk and butterfat prices are expected to rise in the future, which could hurt the unit's profits.
"The company may find it difficult to find a buyer or achieve the level of proceeds commensurate with creating shareholder value," Growe said in a research note.
Growe said possible suitors could include private equity firms, dairy cooperatives, such as the Dairy Farmers of America, and strategic buyers such as H.P. Hood.
An industry banker, who declined to be identified by name, mentioned Treehouse Foods and Michael Foods as possible suitors.
H.P. Hood and Michael Foods declined to comment. Treehouse and Dairy Farmers of America were not immediately available.
Morningstar had net sales of $1.3 billion in 2011, making up 10 percent of Dean's overall sales of $13.1 billion. The company's debt-to-earnings ratio was 4.64 at the end of 2011, down from 5.13.
Following a sale of Morningstar and the spin-off of WhiteWave, Dean would be left with its Fresh Dairy Direct business. That is its largest business, with annual sales of $9.6 billion, but it is the most challenged, since selling milk is a low-margin business.
Costs are dependent on a range of volatile commodities from fuel to dairy and passing on those costs to consumers is not easy, since there is little brand loyalty and consumers often 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 shares closed up 84 cents, or 5.5 percent, at $16.23 on Wednesday.