Activist Investor Plans to Increase Pressure on Bob Evans

By MICHAEL J. DE LA MERCED 12 hours ago

Last week, Bob Evans Farms announced that it had declined to make strategic changes recommended by one of its biggest investors. Now that investor, the hedge fund Sandell Asset Management, plans to turn up the heat on the restaurant operator.

Sandell intends to announce Monday that it will move for change at Bob Evans, potentially including replacing its directors, according to people briefed on the matter who spoke on condition of anonymity because they were not authorized to speak publicly about the fund’s plans.
The hedge fund will begin a so-called consent solicitation, which will let investors vote on changes at Bob Evans outside an annual meeting, the people said. The fund could also seek to amend the restaurateur’s bylaws.
“While we strongly believe that the inherent value of Bob Evans is far in excess of the company’s current share price, we have serious doubts regarding management’s ability to realize this value,” the hedge fund wrote in a letter that it plans to send to other investors. A representative for Sandell declined to comment. A spokeswoman for Bob Evans referred to comments made by the company’s chief executive, Steven A. Davis, on a conference call with analysts last week regarding Sandell’s recommendations, which he deemed unlikely to generate value for investors.
Sandell’s fight against Bob Evans, which runs 561 restaurants and produces packaged foods like sausage, is only one of a growing number of battles being waged in the food industry. Hedge funds are especially keen to shake up restaurant chains whose share performance has lagged as customers have proved reluctant to dine out as much since the recession.
Investors have taken on the parent companies of Applebee’s and the Olive Garden, arguing for moves like a big annual dividend, increased cost-cutting and corporate breakups.
The latest plans by Sandell are not surprising, because the $900 million hedge fund disclosed last month that it had hired a proxy solicitor to advise on shareholder initiatives like a consent solicitation. But they still represent an increasingly aggressive approach by the investor, whose 6.5 percent stake makes it one of the company’s three biggest shareholders. The hedge fund’s efforts most likely took on added urgency after Bob Evans announced last week that it had considered and rejected borrowing against its stores, deeming the maneuver an expensive bit of financial engineering. The company also disclosed that its profits for the quarter that ended in October had dropped 46 percent, to $6.1 million, hurt by rising costs and expansion plans.
Sandell disclosed in late September that it wanted Bob Evans to consider options like splitting itself up, borrowing against its real estate holdings and buying back its stock.
The hedge fund has said that it believes Bob Evans could be worth more than $80 a share, far above its current level of $51.31. It has argued that the company’s stock, which had a market value of $1.4 billion on Friday, trades significantly lower than peers like Cracker Barrel and DineEquity.
Sandell contends that the factors holding back Bob Evans include its significant real estate holdings. The company owns 86 percent of its restaurants and spends millions of dollars on its Farm Fresh campaign to renovate its locations. Separating the restaurant business from the packaged foods arm could lead to greater operational focus at both, leading to a higher stock price.
The hedge fund has said that it has been approached by two real estate investment trusts interested in buying the company’s real estate, and that it thinks Bob Evans should consider a mix of its three suggestions.
But Sandell may also be interested in pushing for a sale of the whole enterprise. It plans to tell investors that it has heard that at least one private equity firm expressed interest in buying Bob Evans, only to be turned down by management.
Executives at Bob Evans, which is based in New Albany, Ohio, have insisted that the company benefits from owning both businesses and from holding on to its real estate. It has already begun a stock-buyback program that is expected to grow to $225 million, while revamping its restaurants and food offerings.
Mr. Davis, specifically, took on Sandell’s suggestions in the conference call with analysts.
“What we have not and will not undertake is financial engineering tactics that place our company’s ability to deliver long-term shareholder value at unnecessary risks,” he said.