Activist investor turns up heat on Bob Evans as shareholder vote looms

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.

View photo

.

Bob Evans

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.

Rates

View Comments (38)

Recommended for You

  • What billionaires really spend each month

    Being rich is getting expensive. Just ask Sam Wyly and Anne Dias Griffin. Court papers detail what they spend on a monthly basis to support their lifestyles.

    CNBC
  • Investing: Can you retire on $1 million?

    Probably. But you have to be smart about your investments and your withdrawals. some tips.

    USA TODAY
  • Three major nations absent as China launches World Bank rival in Asia

    SHANGHAI (Reuters) - Australia, Indonesia and South Korea skipped the launch of a China-backed Asian infrastructure bank on Friday as the United States said it had concerns about the new rival to Western-dominated multilateral lenders. China's $50 billion Asian Infrastructure Investment Bank (AIIB)…

    Reuters
  • Play

    The World's Slimmest Smartphone Isn't Made by Apple

    Oct. 23 (Bloomberg) -- The saturated smartphone market hasn't turned off one British startup from trying to get in on the action. Kazam, founded by two former HTC executives, is hoping to make its mark with a super-skinny handset. CEO Michael Coombes tells Bloomberg what's unique about the Tornado…

    Bloomberg
  • Play

    Report: Total CEO's plane almost escaped crash

    MOSCOW (AP) — The plane carrying a top French oil executive and a crew of three was already in the air when it grazed a snowplow, just failing to avoid the fatal crash, Russian crash investigators said Thursday.

    Associated Press
  • 'Massive' switch to new credit cards ahead

    Bank customers can expect a flurry of thick mail as credit companies rush to get chip cards into their hands ahead of the holiday season.

    CNBC
  • Patients avoiding Dallas hospital where Ebola hit

    DALLAS (AP) — The Dallas hospital where a man diagnosed with Ebola died and two nurses were infected with the virus has seen patients flee the hospital, with a more than 50 percent decline in visits to its emergency room since the crisis began.

    Associated Press
  • Housing is waking up to a new hangover

    Double-digit price gains for homes from just a year ago are disappearing, and suddenly it's no longer a seller's market.

    CNBC
  • Here Are The Only Things You Should Have In Your Wallet

    Your wallet should be an organizational tool...

    Business Insider
  • Suze Orman: Our economy's most dangerous threat

    Even if you don't owe some of the more than $1.2 trillion of student loan debt, you'll be affected by it. Here's why.

    CNBC
  • Sears to close stores, lay off about 5,500: Seeking Alpha

    (Reuters) - Sears Holdings Corp is shuttering more than 100 stores and laying off at least 5,457 employees, investor website Seeking Alpha reported on Thursday, indicating the struggling retailer may be stepping up store closures. Sears said in August it had closed 96 stores in the six months since…

    Reuters
  • Play

    How Nasal Cells Helped a Paralyzed Man Walk Again

    Oct. 24 (Bloomberg) -- A man, paralyzed after being attacked with a knife, is able to walk again thanks to stem-cell research. A team of scientists from the U.K. and Poland managed to take cells from the patients nose and ankle and repair the damagedcells in his spine. The professor who led the…

    Bloomberg
  • Manufacturing moving from China to US: survey

    Large manufacturers are increasingly moving production back to the United States from China, according to a new report by The Boston Consulting Group released Thursday. In the third annual survey of US-based senior executives at manufacturing companies with annual sales of at least $1 billion, the…

    AFP
  • Play

    AT&T keeps T-Mobile at bay, but for how much longer?

    AT&T gave millions of customers a price cut but the savings disappear when subscribers want a new phone. Analysts fear they may defect.

    Yahoo Finance
  • Exclusive: Lockheed, Pentagon reach $4 billion deal for more F-35 jets

    WASHINGTON (Reuters) - Lockheed Martin Corp and U.S. defense officials have reached agreement on the terms of a contract worth about $4 billion for an eighth batch of 43 F-35 fighter jets, sources familiar with the deal said on Thursday. The contract will lower the cost of the radar-evading…

    Reuters
  • Facebook's Zuckerberg wages China charm offensive -- in Mandarin

    Facebook is blocked in China, but its co-founder Mark Zuckerberg appears determined to win over hearts and minds in Beijing -- surprising a hall full of students by conducting a Q&A session in Mandarin. Zuckerberg charmed his audience comprising Chinese and international students when he kicked off…

    AFP
  • Canada’s Biggest Banks Say Worst to Come for Loonie

    The oil boom that powered Canada’s recovery from its 2009 recession is turning into a bust for the nation’s dollar. Canada’s currency tumbled this month to a five-year low of C$1.1385 per U.S. Without a sustained increase in crude, the local dollar will weaken at least another 4 percent to C$1.18,…

    Bloomberg
  • Ruble Extends Drop as Bank of Russia Raises Band Amid S&P Woes

    The ruble extended declines as Bank of Russia shifted its currency band amid concern Standard & Poor’s will cut the country’s credit rating to junk. The central bank raised the corridor against its target ...

    Bloomberg
  • China and 20 other countries sign MOU on regional bank

    China and 20 other countries moved forward on Friday towards setting up an Asian infrastructure lender seen as a counterweight to Western-backed international development banks. The signatories put their names to a memorandum of understanding to establish the Asian Infrastructure Investment Bank…

    AFP
  • American workaholics, what not to buy on Amazon

    Americans are taking the least amount of vacation in 40 years, and what items you’re better off not buying on Amazon.

    MarketWatch