There is no meeting of the minds for Sandell Asset Management Corporation and Bob Evans Farms, Inc.
Sandell Asset, a major shareholder of Bob Evans Farms, is urging the company’s board of directors to split off the Bob Evans Foods business from the restaurant chain, arguing that it devalues the company.
"Due in part to this conglomerate structure, which has negatively impacted analyst coverage and ignores the different constituencies of restaurant and packaged food 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,” wrote CEO Thomas Sandell, in a December 9th letter to Bob Evans Farms' board of directors, and filed with the Securities and Exchange Commission.
Sandell Asset is looking to increase shareholder value. The New York City-based investment firm, which added Bob Evans stock to its company’s portfolio for less than $56 per share, argues that Bob Evans is “materially undervalued,” believing the stock price is worth $80 a share, not the $52.17 it is trading for (at the time of this post). Sandell’s firm owns 5.1 percent, or 1.4 million shares of the company.
In addition to splitting up the company, Sandell is looking to unlock what he cites is the “substantial real estate value embedded in its many owned restaurant properties through a sale-leaseback transaction.”
In other words, he wants Bob Evans Farms to sell and lease back its 480+ company-owned restaurants, similar to what Cracker Barrel and Denny’s have done. The cash value of selling off the food products division and the sell-lease program would generate more than $1 billion, allowing Bob Evans to buy back shares from current shareholders at $60/per share.
Part of Sandell’s concern is that by being undervalued, Bob Evans is ripe for a takeover. Bloomberg News reported in January 2012 that the company’s debt-equity ratio made it “the cheapest U.S. restaurant chain with a value greater than $1 billion.”
Bob Evans executives, meanwhile, want to stick to the company’s growth strategy, which involves remodeling restaurants, acquiring food products businesses—such as the August 2012 Kettle Creations purchase—and enhancing its bakery and takeout offerings.
In a statement released December 9th, Steven A. Davis, Bob Evans chairman and CEO, states its “focus on 'share of stomach,’ a model increasingly embraced by others in the restaurant industry, offers significant opportunities for sales synergies, margin expansion, and brand enhancement, as well as providing “significant synergies with our restaurant business, benefits we expect to realize more fully as we complete the integration of Kettle Creations, and from plant optimization.”
Davis also argues that the sale and leaseback of a significant portion of the company’s restaurants would “be one of the most expensive forms of financing we could take on, relative to other forms of debt we can access. It would also significantly reduce the flexibility we now have to remodel our restaurants and shutter poor performing restaurants, a key factor in the historical and long‐term success of our restaurant business.”
In short, senior management at Bob Evans believes growing its Farm Food business, rather than spinning it off, as well as holding on to its real estate, is the right path to create significant shareholder value. Sandell Asset Management disagrees.
By Joann Whitcher