Sandell Asset Management is doubling down on its assertion that Bob Evans Farms Inc. should spin off its packaged foods subdivision — saying that it might be worth more than the entire company.
In a presentation released last week, Sandell reiterated its long-held view that BEF Foods’ value is not fully reflected in the company’s stock price, which trades mostly on the performance of the restaurant chain.
The activist, which has struggled to convince Bob Evans to sell the division even after placing several directors on the company’s board two years ago, estimates that BEF Foods is worth $1.2 billion.
Bob Evans’ total enterprise value, or the company’s total value including market capitalization and debt, is about $1.1 billion, according to Yahoo! Finance.
Given the value of BEF Foods compared with the valuations of other publicly traded food companies like Hormel suggests investors are giving Bob Evans’ restaurant division a negative valuation.
“This is made all the more shocking when one considers the company still wholly owns the land and buildings to 305 of its operating restaurants along with 21 of its closed properties,” Sandell wrote. Bob Evans operates 527 restaurants in 18 states, mostly in the Midwest.
Sandell has been an activist in Bob Evans since 2013 and currently owns 7 percent of the company’s stock. It won four seats to the company’s board the next year, a substantial say but not a majority. Bob Evans has since replaced its CEO and has undergone a series of sale-leaseback deals, selling company property and leasing it back from the buyers.
But Bob Evans has held steadfast in its belief that the company would be better off keeping the division. Saed Mohseni, Bob Evans’ CEO, said earlier this year that the company trades at a higher valuation, given the restaurant chain’s sales struggles in recent years, because of the presence of the packaged foods division.
Sandell, however, has intensified pressure on the company to reconsider that position. Earlier this year, the investor hinted that it could make another run at the board if Bob Evans doesn’t sell BEF Foods.
The activist believes the presence of the restaurant company hides the presence of the packaged foods subsidiary.
BEF Foods has substantially higher profit margins than the restaurants. Bob Evans Restaurants in the most recent fiscal year had a cash flow margin of 12.1 percent. BEF Foods had a cash flow margin of 23.4 percent, according to the presentation. BEF Foods made up 44 percent of the company’s cash flow last fiscal year despite having only about a third of the company’s revenue.
Bob Evans trades at a multiple of 7.8 times cash flow, far lower than average — 8.9 times cash flow — for mostly company-operated restaurant chains. By comparison, according to Sandell, packaged foods companies on average trade at multiples of 13.7 times cash flow.
Sandell also argues that there are few opportunities for the packaged foods division and the restaurant division to work together to lower costs. BEF Foods operates independently, with a separate management team. Mohseni, meanwhile, comes from a restaurant chain background, having most recently been the CEO of Bravo Brio Restaurant Group Inc..
The investor also believes that BEF Foods could be better off away from Bob Evans because it would be able to sell products licensed from other restaurant chains.
The investor also calls the division a “distraction” that could hamper Mohseni’s ability to reinvigorate Bob Evans. Same-store sales at the chain fell 2.5 percent in the most recent fiscal year. But traffic fell 5.4 percent.