Bob Evans Farms: A Tasty Opportunity

 | Feb 13, 2014 | 5:30 PM EST  | Comments
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Bob Evans Farms (BOBE) is a combination of family of restaurant and seller of Bob Evans-branded packaged foods sold in supermarkets. Trading for about $51 per share and with a market value of a $1.3 billion, hedge fund Sandell Asset Management is pushing the Columbus, Ohio, company to split the two businesses, arguing that doing so could lead to a breakup value of up to $80 per share, or 60% above today's price.

Bob Evans has two principal divisions. Bob Evans Restaurants operates 561 locations concentrated in the Midwest. Net sales were $981 million in fiscal 2013, or 74% of the company's overall consolidated revenues. Restaurant operations recorded an operating profit of $75 million in fiscal 2013. Bob Evans Foods sells packaged foods, including frozen sausage, prepackaged side dishes and other frozen foods to more than 30,000 stores. The division generated approximately $350 million in sales in 2013, yet it recorded an operating loss of $137 million.

Sandell believes that BOBE management has not been focused on shareholder value (recently, the company released a lengthy presentation arguing to the contrary). While shares in BOBE more than doubled in past three years, Sandell argues that the stock has actually underperformed peers by 180% over the past five years.

The hedge fund is pushing the company to do a sale-leaseback of its owned real estate and to sell or spin off the packaged-food business. Currently, only 5% of the company's packaged foods are sold to Bob Evans restaurants. Sandell believes the real estate is worth $700 million. In fact, BOBE has received unsolicited offers from real estate investment trusts to buy its owned stores. Those proceeds could be returned to shareholders via buybacks or dividends. The company argues that a sale-leaseback transaction would increase the company's cost of capital as opposed to financing via a credit line.

Either way, this is a very intriguing special-situation play. The company is getting attention, whether it likes it or not. The board recently required an 80% supermajority shareholder vote to amend the company's bylaws, a move that helps directors hold their board seats. Because of this, the company was sued by the Oklahoma Firefighters Pension Fund. Cleary, the board is nervous.

The upside is intriguing. Bob Evans is a tasty idea.

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