In the ever-competitive publicly traded restaurant landscape, there are the newcomers such as Shake Shack (SHAK) , and Zoe's (ZOES) , the established but still solid growers such as Chipotle (CMG) and Action Alerts PLUS holding Panera (PNRA) , the stalwarts such as McDonald's (MCD) , the troubled such as Ruby Tuesday (RT) , and Noodles (NDLS) , and the all-but forgotten. In the last category, I put Bob Evans Farms (BOBE) , although that should not be confused with a negative impression of the company, but rather of a long-standing brand (and stock) that simply does not get much attention.
To the contrary, Bob Evans may be a second-tier brand that has struggled a bit, but it is still a profitable one that also happens to be asset-rich. The Ohio-based company, which went public in 1963, currently operates 527 restaurants in 18 states, with more than half of its locations in Ohio (192), Michigan (49), and Florida (47). In addition, it operates a food products business (BEF Foods) which provides 60 varieties of sausage, as well as prepared foods. Last year, this segment generated $219.4 million in revenue, or about 16% of total company revenue.
In terms of assets, the company still owns the land and building for 305 locations, plus two farms (937 acres and 30 acres), and its corporate support center, which sits on 41 acres. In April, BOBE completed a sale-and-leaseback transaction for 143 restaurant locations for $197.2 million, or about $1.38 million each, which netted the company $164 million after taxes and transaction costs. Proceeds of the sale were used to reduce debt, and buy back stock.
Much of what has recently transpired at Bob Evans has occurred under the watchful eye of activist investor Sandell Asset Management, which has been pushing for change for the past three years. In an August 2014 proxy fight, Sandell won four of the company's 12 board seats. However, the road has been bumpy since then, especially after the new board rejected Sandell's December 2015 proposal to separate the restaurant and BEF Food segments. The board did not believe BEF was large enough to stand on its own in a spinoff, and also cited concerns over that transaction's potential tax implications
After reducing its stake in BOBE to 7% this past March, Sandell recently increased it back to 8.1% (including call options), and the situation is heating up. The firm's recent 13D filing indicates that it will continue to push for the separation of BEF Foods and Bob Evans Restaurants in order to maximize shareholder value, including the possibility of a consent solicitation from shareholders.
Markets have not been kind to BOBE shares, which are down about 30% since March 2015. The company has continued to increase its dividend over the years, and the stock currently yields 3.5%.
From a valuation perspective, it is not cheap at 16x next year's consensus earnings estimates, especially given the currently overvalued state of the restaurant sector. However, this is the epitome of a special situation, which Sandell believes could be worth $57-$66/share if the businesses separate.
We'll see if Sandell moves forward with an attempt to put that question to shareholders.
