In a letter to Bob Evans’ board of directors, Thomas E. Sandell, CEO of the investment firm, recommended three potential strategies. The strategies include spinning off the food business; unlocking the real estate value embedded in Bob Evans’ many owned restaurant properties through a sale-leaseback transaction; or implementing a large self-tender with most of the proceeds generated from the first two recommended strategies.
If Bob Evans were to pursue the recommendations, Sandell said he believes the company could generate approximately $1.08 billion in proceeds and, as a hypothetical example, could use 75 percent of the proceeds to repurchase its shares at $58 per share while still leaving the company with substantial cash on the balance sheet. Sandell further noted a potential post-tender stock price of between approximately $73 per share and $84 per share, or an average price of $78.50 per share, could be justified.
Talks between Sandell Asset Management and the Bob Evans board of directors have been taking place since Aug. 5, according to Sandell’s letter. He noted that he was disappointed no mentions of Sandell Asset Management’s recommendations were included in Bob Evans Farms’ most recent Aug. 19 earnings release.
“We believe that Bob Evans suffers from a conglomerate discount as a result of the company’s two disparate business segments: a restaurant business, Bob Evans Restaurants, and a packaged foods business, BEF Foods,” Sandell wrote. “Due in part to this conglomerate structure, which has negatively impacted analyst coverage and ignores the different constituencies of restaurant and packaged foods investors, the company has traded at a perennial discount to its restaurant peers, and at an even greater discount to companies in the packaged foods space.
“Given this history, it is particularly concerning to us that management continues to proclaim the ‘corporate synergies’ and ‘cross-segment strategies’ between Bob Evans Restaurants and BEF Foods. The benefits of continued integration between these two businesses do not seem compelling and we believe that management may be touting these perceived benefits to justify the preservation of their ‘empire’ and their refusal to separate these two businesses. In addition, we believe that the market is not affording Bob Evans adequate value for its substantial real estate holdings, which include its 482 wholly-owned restaurant properties.”
Sandell concluded his letter by telling the board of Bob Evans Farms that “we are prepared to take further steps to protect the value of our investment in Bob Evans should we perceive that the board is not addressing these important matters in a timely fashion.”
For its most recent quarter, income for Bob Evans Farms declined 39 percent on impairment and restructuring costs. For the quarter ended July 26, the company had income of $9,153,000, equal to 33 cents per share on the common stock, which compared with $15,008,000, or 53 cents per share, during the same quarter of the previous year. Net sales were $329,449,000, up 2 percent from $323,441,000 during the same quarter of the previous year.