This post is part of the On the Margin blog.
An activist investor has been pushing Bob Evans Farms Inc. to sell its packaged foods subsidiary, BEF Foods, for at least two years now.
The push led to a proxy fight in 2014 in which the activist, Sandell Asset Management, won four seats to the company’s board. Its longtime CEO Steve Davis resigned, replaced recently by Saed Mohseni.
So far, Bob Evans has largely resisted efforts to sell that subsidiary, even as the company sells its real estate and cuts costs.
The New Albany, Ohio-based company said a year ago it wouldn’t consider a sale “at this time,” suggesting it wouldn’t yield enough of a benefit to shareholders.
Sandell has continued to put pressure on the company since to reconsider that stance. In December, Sandell sent a letter to Bob Evans, suggesting that a sale could fetch the company nearly $1 billion.
On Wednesday, Sandell took another public route. Its CEO, Thomas Sandell, asked Mohseni on the earnings call about a possible BEF Foods sale.
That’s a rare event. Activist investors almost never go on earnings calls to ask questions of the CEOs of the companies they’re targeting — mostly because the companies pick who gets to ask those questions. That Sandell asked a question, and Bob Evans chose to take that question and respond, is unusual.
That could certainly signal some frustration on the part of Sandell that a sale hasn’t happened, and perhaps some hope that Mohseni, as the company’s new face, would bring about a different view on the idea. A Sandell spokesman told me Wendesday that the investor has “good relations” with the company.
Still, to Sandell, the packaged foods subsidiary represents vast, untapped value.
Sandell argues that, at a valuation of 16 times cash flow like the packaged foods company Hormel, BEF Foods could be worth “well over $1 billion.” That’s a bit rosier than the December letter.
Bob Evans’ stock price is “not reflecting this potential value,” he said. Bob Evans’ market cap is currently $991.81 million.
Mohseni provided a non-committal response to Sandell’s question. “The company has looked at, and will continue to look at, all options to enhance shareholder value,” he said.
Yet he also noted that BEF Foods gives Bob Evans some trading benefit on Wall Street. While the company’s market capitalization doesn’t reflect the true value of the two businesses, it is trading at just less than 10 times trailing cash flow.
That’s high for a restaurant chain like Bob Evans that has been struggling with declining same-store sales, including a 3.6-percent fall in the quarter that ended Jan. 22.
“Bob Evans restaurant company is trading at a much higher multiple than most restaurants with declining [same-store] sales,” he said. Indeed, the trading multiple for both Ruby Tuesday, Inc., and Ignite Restaurant Group, Inc., are about six.
“If the restaurant was a freestanding company, it would probably be [trading] closer to seven,” Mohseni said. “We’re getting some credit for that, but clearly not enough.”
It’s rare for restaurant chains to operate packaged foods subsidiaries. In this case, BEF Foods is outperforming the restaurant chain by a large margin. Operating income at BEF Foods, which sells sausage and side dishes at grocery stores, rose 33 percent in the quarter, while net sales rose 1 percent.
“We need to educate shareholders on the fact that the food division is a profitable business,” Mohseni said, “one that has grown substantially, year over year, and one with the potential to grow for years to come.”
Investors frequently push companies to sell assets and concentrate on a single line of business or even a single restaurant chain. When a company and its stock doesn’t perform up to expectations, that pressure intensified.
And despite all of Bob Evans’ efforts, including $12 million cost cuts this year, an extensive refranchising and improvements at BEF Foods, the company’s stock price is virtually unchanged in the 18 months since Sandell won those seats.