Sandell: Separate Bob Evans businesses

by Erica Shaffer
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NEW YORK – The Bob Evans Restaurant business has produced negative same-store sales in fiscal 2016, and that is a terrible distraction to the overall profitability of Bob Evans Foods (BEF), argued Sandell Asset Management, one of the largest shareholders of Bob Evans. It isn’t the first time Sandell has pushed for splitting the businesses. Earlier this year, as part of its campaign, the shareholder claimed in a letter to the board of directors that the company could fetch more than $950 million for its packaged foods unit. During a March 2 earnings call, Tom Sandell raised the issue again.

In response, Saed Mohseni, who became president and CEO of the company on Jan. 1, said: “Obviously Bob Evans is made out of two great divisions; one happens to have grown substantially over the last few years and … has generated a substantial amount of growth.”

More recently, Sandell released a presentation detailing the investor’s argument for separating BEF Foods and Bob Evans Restaurants. Sandell believes separating the restaurant and packaged foods businesses would unlock the true value of BEF Foods which is being overshadowed by losses in the company’s restaurant business.

In the presentation, “Sandell cites the high valuation of many publicly-traded packaged foods companies as well as the mid- to high-teens multiples of EBITDA paid in numerous recent transactions in the packaged foods space as evidence justifying its belief that the value of BEF Foods may approach $1.2 billion, which would exceed the approximate $1.07 billion current enterprise value (market value plus net debt) of the entire company.”

Sandell added that the market is ascribing negative value to the Bob Evans Restaurants, which the investor said is “all the more shocking considering that Bob Evans wholly-owns highly valuable real estate associated with the land and buildings of over 300 of its restaurants, which is in addition to the 143 restaurants that were part of a recent $197 million sale-leaseback transaction.”

Additionally, Bob Evans announced plans in April to close 27 underperforming restaurants, including 21 company-owned locations and six leased properties. The company expected the closures to generate approximately $20 million from the sale of the company owned properties, while improving operating income by an estimated $1 million per year.

Sandell believes some alternatives to achieve an “industrially compelling” and “taxably favorable” separation of the two businesses include:

  • a spin-off or split-off of BEF Foods;
  • a “sponsored” spin-off of BEF Foods;
  • a “Reverse Morris Trust” with BEF Foods or Bob Evans Restaurants; and
  • a spin-off of Bob Evans Restaurants.

For the fourth quarter ended April 29, the company reported consolidated GAAP net income of $580,000, or 3 cents per diluted share, compared with net income of $5.61 million, or 24 cents per diluted share during the same period last year. Excluding restaurant closures and other items, non-GAAP net income for the quarter was $9.5 million, or 48 cents per diluted share, compared with $13.2 million, or 56 cents per diluted share a year ago.

Consolidated net sales for the period climbed 4 percent to $345,587,000 compared with $332,393,000 in the year-ago quarter.

BEF reported net sales [excluding the 53rd week of FY2016] of $95.3 million, up 1.1 percent compared to $94.2 million reported in the fourth quarter last year.

Bob Evans will release its first quarter FY2017 earnings on Aug. 31.

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