Sandell Asset Management is again urging the board at Bob Evans Farms Inc. to sell off its packaged foods subsidiary, BEF Foods, suggesting that the deal could fetch the company nearly $1 billion.
The activist investor also said that it has an interested buyer: St. Louis-based packaged foods company Post Holdings Inc.
“We have been told by knowledgeable sources that Post had expressed an interest in pursuing a transaction with Bob Evans involving its packaged foods business, BEF Foods, within the last year,” Sandell CEO Thomas Sandell wrote. “Furthermore, we understand that Post has a continuing, strong interest in pursuing a transaction with Bob Evans involving BEF Foods, and has the ability to creatively structure a transaction in a manner that could reduce or eliminate the tax consequences to Bob Evans.”
In a statement, a Bob Evans spokesman said that, “We at Bob Evans welcome feedback from our shareholders. We have maintained an active dialogue with the Sandell Group about our business. Our board is focused on ways to improve performance and increase shareholder value and will continue to review ways to accomplish these goals.”
Sandell owns 9.6 percent of Bob Evans stock. The activist had sent a letter in November after learning that Post was interested in the subsidiary. The latest letter was sent after it learned that Post was still interested in an acquisition.
Sandell has pushed New Albany, Ohio-based Bob Evans to sell BEF Foods for two years now, and the subject was a centerpiece of the investor’s proxy fight with the company in 2014, a proxy in which the activist won four seats to the Bob Evans board.
But those efforts haven’t resulted in a sale. In March, the Bob Evans said it would not sell the division, saying that a deal would not yield enough of a return. The company seemed to back off a bit in June, however, suggesting that it is still open to the idea.
Sandell argues that a split of the restaurant business and the packaged foods business would increase shareholder value.
The packaged foods business has been performing well. Sales at the division increased 2.3 percent in the second quarter, the Bob Evans said this week, and its operating income surged by $6.4 million to $14 million thanks to lower pork costs.
But the restaurant business has struggled. Traffic in the quarter fell 5.7 percent at the 548-unit family dining chain in the company’s fiscal second quarter ended Oct. 23, and same-store sales fell 3.2 percent.
Sandell asserted that now is a good time to sell the division because of the increasing valuations being attached to packaged foods companies, along with the new leadership coming next year with CEO Saed Mohseni.
Sandell believes the valuation of BEF Foods to a strategic buyer such as Post could be greater than the entire market value of Bob Evans Farms Inc.
Bob Evans trades at about $40 per share, giving the company a market value of $855 million.
Yet packaged foods companies are trading at high multiples now. Hormel, Sandell said, is trading at a multiple of 15 times earnings before interest, taxes, depreciation and amortization. Other companies are trading at multiples of as much as 18 times EBITDA.
Based on the company’s most recent numbers, BEF Foods could generate as much as $83 million in EBITDA this year, before subtracting for corporate overhead, Sandell said. Given the valuations being given to packaged foods companies, “It is not unrealistic to assume that BEF Foods could command a value in excess of $950 million,” Sandell said.
The activist also noted that Bob Evans’ “enterprise value,” which combines market value and company debt, is $1.32 billion. If BEF Foods’ value is $950 million, then investors are valuing the restaurant business at $370 million. “This is less than half of the approximate $800 million in value that could be ascribed solely to the company’s owned restaurant real estate,” Sandell wrote. “Bob Evans is being punished by maintaining combined ownership of both its restaurant and BEF Foods business.”
Sandell urged Bob Evans to hire a new financial advisor to assess different alternatives in which Bob Evans could split its subsidiaries in a tax-efficient manner. A financial advisor who recommended against a sale in March suggested that taxes on any sale of BEF Foods would offset any financial benefit.
“While there is a compelling industrial logic to separating BEF Foods, the company must also be mindful of tax issues and we fully understand the complexity that may be involved in planning such a business separation,” Sandell wrote
“It continues to be our strong contention that the intrinsic value of Bob Evans is far greater than the value implied by its current stock price and, given the dramatic uptick in valuations in the packaged foods space, we believe that the ultimate separation of BEF Foods and/or Bob Evans Restaurants would serve to narrow what we believe is this draconian discount to intrinsic value.”
Contact Jonathan Maze at [email protected].
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