An activist investor is going directly to shareholders with its demand that Bob Evans Farms Inc. separate its restaurant chain from its packaged food business.
Sandell Asset Management, which owns 8 percent of Bob Evans stock, said in a letter to the company’s board of directors Thursday that it would seek a consent solicitation over its demand that the company spin off BEF Foods — the division that makes packaged side dishes and other products for sale at grocers and other retailers.
The investor will ask shareholders to vote, in writing, in favor of a proposal recommending the board “publicly commit to a transparent process leading to the separation of BEF Foods and Bob Evans Restaurants or another alternative that maximizes shareholder value.”
These votes are nonbinding. But the investor suggested that a consent solicitation could be used to remove directors or change the board makeup if the company goes against shareholder wishes.
“We have profound concerns regarding the continued disconnect between the company’s stock price and the value associated with its two independently-operated business segments, Bob Evans Restaurants and BEF Foods,” Sandell CEO Thomas Sandell wrote in the letter.
“This disconnect has grown more pronounced in recent months.”
The company did not comment on the letter, but a spokesman did reference a comment CEO Saed Mohseni made during an earnings call in August.
“Our board of directors continues to evaluate all options for creating shareholder value while being professionally advised in this process. All of us here at Bob Evans continue implementing positive changes to improve our business and increase efficiency. We are encouraged by recent progress and are motivated by the challenges ahead.”
Sandell, which won four seats to the Bob Evans board in 2014, has been pushing for a separation for years, arguing that the company would be worth more to shareholders as two separate entities, rather than one. It has intensified that push this year.
In recent months, Bob Evans has appeared more open to the prospect of a separation. In his letter, Sandell suggested that recent talks with the company have proven “frustrating.”
“While we have repeatedly sought to keep our dialogue with Bob Evans both cordial and private, recent discussions with the company have proved frustrating,” Sandell wrote. He noted that the investor was willing to sign a non-disclosure agreement to ensure an “open exchange,” but the company refused.
Company executives have argued that BEF Foods, which has enjoyed strong sales recently, give Bob Evans a stronger valuation than it would receive as a standalone restaurant chain.
But Sandell argues that investors buy and sell the stock based largely on the performance of the restaurants, which have struggled with weak sales in recent years. Same-store sales in the quarter ended July 29 fell 4.3 percent.
Bob Evans’ stock is down 34 percent over the past three years, Sandell said in its letter. “We can take no comfort in the many claims made by the company that it is focused on increasing shareholder value when the stock price paints a starkly different picture,” he wrote.
The company has also underperformed the restaurant industry over that same time period. And it has performed even worse when compared with other publicly traded packaged foods companies.
Bob Evans has an enterprise value of $1.1 billion. Sandell believes that the value of BEF Foods on its own “may approach $1.2 billion.”
Sandell also noted that restaurant companies trade at valuation multiples of 8 times cash flow. By contrast, packaged foods businesses trade at about 14 times cash flow.
And he argues the two businesses are largely independent, with few synergies between them to reduce costs.
The investor also argues that the company would not get parties potentially interested in buying BEF Foods without committing to a public process to pursue shareholder value efforts.
“Almost no financial or strategic party is going to proactively approach Bob Evans and spend the time and money involved in seeking to effect a transaction when the company has not demonstrated a full commitment to pursuing some form of transaction,” Sandell wrote.
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