Bob Evans Farms Inc. (BOBE) is a chain of family restaurants built around midcentury rural nostalgia and homey comfort foods including “sweet & stacked hotcakes” and “Broasted chicken.” Since last year, though, executives of the New Albany, Ohio, company have been made uncomfortable by an aggressive New York activist investor demanding it step to the pace of today’s Wall Street. The activist, Sandell Asset Management, charges the company has become fat and lazy, treating shareholders to subpar profitability, weak stock performance and an inefficient corporate structure.
The firm has nominated a slate of eight director candidates in a bid to take over the board and pursue a strategy to sell or spin off a major division, cut overhead expenses, revive sales and cash in some of its valuable restaurant real estate. It argues that, under this plan and based on valuations of comparable companies, the stock would be worth more than $70, compared with $48 today.
Bob Evans has resisted these measures, while casting Sandell as a short-term-focused financial shakedown artist. The conflict, being waged through press releases and PowerPoint presentations, will come to a head with a shareholder vote and annual meeting Aug. 20.
Sandell, a value-oriented activist firm with $1 billion under management, first bought shares in Bob Evans in April 2013 and began pushing management to revamp its strategic and financial approach soon thereafter, using a website called Refresh Bob Evans to lay out its case. Activists typically look for companies with underperforming shares, inefficient balance sheets, poor capital allocation and weak operating trends that obscure a good underlying business.
Rich history, poor recent performance
Bob Evans dates to a real farmer of the same name in Southeastern Ohio, who in 1953 started making sausage to serve at his small diner and sell to bypassing truck drivers. The company went public in 1963, and now boasts a market value of $1.1 billion and nearly 600 restaurants across 19 states, mostly in the Midwest and Southeast.
The company embraces its heritage, still operating the original 937-acre Evans homestead as a museum and holding an annual autumn farm festival on the site, which is listed on the National Register of Historic Places. Under CEO Steve Davis, who arrived in 2006 after years at Yum! Brands Inc. (YUM), it's built a $48 million suburban headquarters Sandell calls excessive and unnecessary, given that the city of Columbus offered tax incentives to remain in its former facility.
Sandell makes much of Bob Evans’s purchase of a share of a new private jet, and has fashioned a diagram illustrating a board it says is made up of long-tenured directors with numerous overlapping affiliations with local corporate and charitable groups.
A ballyhooed $120 million “Farm-Fresh Refresh” capital-investment program has helped sales trends in renovated stores but hasn’t been enough to keep comparable-store sales from falling or to prevent the company from repeatedly lowering earnings guidance in recent quarters.
A bitter campaign
As often occurs in activist situations involving a shareholder vote, the back-and-forth between Sandell and Bob Evans has taken on the tone of a political campaign, with each side doing opposition research, massaging data to serve its purposes and lobbing charges of dishonesty at its adversary.
In this case, Sandell seems to have many valid points about Bob Evans's operating approach and corporate governance, and has won support for its board nominees from independent proxy-advisory firms ISI and Glass Lewis. Still, the market hasn’t bid up Bob Evans shares to a point suggesting Wall Street believes value-unlocking change is a sure bet.
Sandell points to the lousy relative performance of Bob Evans stock over multiple time periods. Its closest competitor, Cracker Barrel Old Country Store Inc. (CBRL), has delivered twice the shareholder return since 2009. The company counters with a chart of the stock since the day Davis became CEO, showing it's done better. Sandell parries by noting this view is flattered mightily by the stock’s rise in response to its own campaign.
Bob Evans’s response to Sandell’s charge of mismanagement has largely been to cite temporary factors such as weather and high raw-material prices for recent profit shortfalls, while insisting Sandell’s prescription is riskier than its own measured plan for revamping restaurants and streamlining operations.
The company has offered adjustment factors to contend its overhead expenses aren't as bloated as they appear given the inclusion of the packaged-food unit and extraordinary infrastructure expense programs.(Naturally, Sandell then assailed Bob Evans's creative math in making its numbers appear better.)
After Sandell first contacted the company, Bob Evans expanded its share-buyback program by some 600% and began aggressively bidding for its stock. In another concession, two of the 12 directors have opted not to stand for re-election, which assures at least two of Sandell’s eight nominees will end up on the board.
The most tangible and direct option Sandell is pushing is for Bob Evans to explore the spinoff or sale of Bob Evans Foods, which produces packaged items such as sausage and mashed potatoes for distribution in supermarkets and food-service venues. The division accounts for about a quarter of company revenue, and Sandell argues with some justification that there's little synergy between the business and core restaurants. The merger-and-acquisition market for branded packaged-food companies has also been strong. Hillshire Brands Co. (HSH), for instance, was the subject of a recent bidding war before agreeing to be acquired at a rich price by Tyson Foods Inc. (TSN).
Bob Evans has sat out one of the strongest trends in chain restaurants in which company-owned stores are sold to real estate investors or franchisees, owning the vast majority of its locations. Sandell insists that, far from a hypothetical asset opportunity, actual private investor groups have surfaced as likely willing buyers and could value all real estate holdings as high as $900 million – the vast majority of Bob Evans’ market value.
The company (which wouldn't comment beyond its public communications) makes the somewhat disingenuous claim that selling the buildings would be risky, subjecting the business to scary landlords and potentially rising rents.
Yet the virtues of extracting capital from physical stores is pretty well the industry standard, and owning them hardly seems to offer “strategic” value, as the company says. It has been a core financial maneuver of chains ranging from DinEquity to Jack in the Box Inc. (JACK).
Echoes of the Darden fight
In some respects, this fight resembles the ongoing activist scrap over sluggish performance and strategy at Darden Restaurants Inc. (DRI), which has resisted a wholesale breakup and monetization of its real estate, but did hastily sell the Red Lobster chain and just ousted its longtime CEO. This is possibly a sobering example for Sandell, given that Darden shares have not gotten a sustained lift despite activists’ efforts there.
Activist campaigns must be fought uphill, given the built-in advantage of company management conveying an “us vs. them” message with shareholders, not to mention general investor inertia on governance matters.
Bob Evans seems even to have altered its last quarterly profit-reporting schedule, postponing its release due to ongoing financial-reporting weaknesses it was remediating. This pushed the report, which fell way short of forecasts, past the “record date” by which shareholders needed to own shares in order to vote in the current proxy contest.
Next week, we’ll see if the company’s exertions were enough to fend off, for now, the shareholder coup attempt that's disturbed its bucolic calm.
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