NEW YORK — Sandell Asset Management, an investor in restaurant and packaged foods operator Bob Evans Farms, began publicly questioning the company’s strategic focus in 2013. Since then Bob Evans Farms has revamped its board, brought in a new chief executive officer and tried a number of strategies to improve the overall value of the company. Dissatisfied with the results, on Aug. 26, Sandell said enough is enough and called for the breakup of the company.
“Sandell believes that the stock price of Bob Evans (which opened at $37.64 on Aug. 26) does not reflect the significant value associated with the company’s growing and highly-profitable packaged foods business, BEF Foods, which generated segment EBITDA in excess of $90 million for the fiscal year ending April 2016,” Sandell said in a statement.
In its presentation that accompanied its statement, Sandell Asset Management cited the valuation of such publicly traded food companies as B&G Foods, Inc., ConAgra Foods, Inc., and Hormel Foods Corp., as well as the mid- to high-teens multiples of EBITDA that have been paid in several recent transactions that have taken place in the packaged foods space.
The investor went on to say it believes the value of BEF Foods may approach $1.2 billion, which exceeds the approximate $1.07 billion current enterprise value of the entire company.
“Based on the foregoing, Sandell believes that the market is ascribing negative value to the company’s restaurants business, which it finds 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,” Sandell said.
In fiscal 2016, ended April 29, BEF Foods generated $387,615,000 in sales. The business unit manufactures and markets three product lines to retailers and food service operators, including refrigerated side dishes, breakfast sausage and frozen foods. Side dishes made up 51% of sales followed by retail sausage (23%), food service (19%, with 7% of sales going to Bob Evans Restaurants), frozen (4%) and other (3%).
“We believe Hormel Foods Corp. is a close comparable to BEF Foods in terms of underlying business mix and similar evolution away from a meat and protein-oriented business towards a branded, value-added packaged foods company,” Sandell said in its presentation advocating for a spin-off.
In explaining the logic behind its proposal, the investor said there are few synergies between Bob Evans Restaurants and BEF Foods; each operates independently of the other and has their own management teams; the new c.e.o., Saed Mohseni, has experience in restaurant operations, but little in packaged foods; and a separation would allow the management of each to be incentivized with equity directly tied to the performance of each segment.
Taxes remain an issue, but four options recommended by Sandell may lessen any impact. The recommendations included spinning or splitting off BEF Foods; conducting a sponsored spin-off of BEF Foods; creating a reverse Morris Trust with BEF Foods or Bob Evans Restaurants; or spinning off the Bob Evans Restaurant business.
“While we are not specifically advocating one option over the other, a spin-off of Bob Evans Restaurants merits further discussion, and we believe a spin-off of Bob Evans Restaurants could be effected on a tax-free basis,” Sandell said. “If Bob Evans were to spin off Bob Evans Restaurants, the existing parent company Bob Evans would in essence become the stand-alone BEF Foods business and thus a pure-play packaged food company, which should trade in line with other packaged food companies …”
Bob Evans Farms declined to comment on Sandell’s most recent effort, but did refer to a comment by Mr. Mohseni this past June during a call with financial analysts in which he said the company is evaluating all options for increasing shareholder value.
Bob Evans Farms is scheduled to release its earnings for the first quarter of fiscal 2017 on Aug. 31.