Sandell: Separating BEF Foods And Bob Evans Restaurants

Sandell Asset Management: Separating BEF Foods And Bob Evans Restaurants.

Introduction

• We believe the underlying value of Bob Evans Farms, Inc. (“Bob Evans” or the “Company”) (NASDAQ: BOBE) is substantially higher than its current stock price and we believe that the value of the wholly-owned Bob Evans Farms Foods (“BEF Foods”) business may exceed the enterprise value of the entire Company. We continue to believe the Company should pursue a separation of its Bob Evans Restaurants (“Restaurants”) and BEF Foods business segments
  • Bob Evans Restaurants operates 527 family-dining restaurants in 18 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the United States and at the end of Fiscal 2016 wholly-owned the real estate (land and building) to 305 of its operating restaurants along with at least 21 closed restaurants. Bob Evans received $197 million (approximately $164 million after-tax) from the sale-leaseback of 143 of its owned and operating restaurant properties in April, 2016, and these 143 restaurants are in addition to the aforementioned 305 operating properties
  • BEF Foods is a leading packaged foods business, producing home-style refrigerated side dishes, frozen food items and pork sausage products distributed to over 30,000 retail locations in all 50 states as well as Canada
  • BEF Foods operates independently, has its own management team, and Bob Evans reports the results of each business segment separately
  • BEF Foods is rapidly growing, highly profitable and generated segment EBITDA of over $90 million for the Fiscal Year ending April, 2016 (FY2016). It is our belief that the value of BEF Foods may approach $1.2 billion, which would exceed the enterprise value of the entire Company Bob Evans continues to be viewed as a restaurant company by investors and there are no packaged foods analysts following Bob Evans, even though almost half of Company EBITDA is generated by the growing and highly-profitable BEF Foods packaged foods segment

BEF Foods

• BEF Foods has three key product lines of business as well as a food service presence and is the #1 dinner refrigerated side dish brand, with a 50% share of dinner sides in its Fiscal 4Q. More than half of last fiscal year’s BEF Foods volume was generated from the high margin, fast-growing and strategically important refrigerated side dish category

BEF Foods Sales Mix

• Over half of the sales volume at BEF Foods over the last year was from refrigerated side dish products

Growth of BEF Foods is Unrecognized

• BEF Foods has demonstrated remarkable growth in overall profitability…

…but this is going un-recognized by the investment community, who continue to fixate on the negative same store sales performance of the Restaurants business:

Current Valuation

• Bob Evans trades at a multiple of EBITDA even lower than that of many restaurant companies, with strikingly little value consideration for its growing and highly-profitable BEF Foods packaged foods business

BEF Foods vs Hormel

• We believe Hormel Foods Corporation (NYSE: HRL) is a close comparable to BEF Foods in terms of underlying business mix and similar evolution away from a meat and protein-oriented business towards a branded, value-added packaged foods company. Hormel generated 47% of its revenue from its “Refrigerated Foods” business in its last fiscal year; BEF Foods generated 51% of its revenue from its refrigerated “Side Dishes” business line over the last year

•  In the Investor Presentation filed by Bob Evans, the Company itself has drawn many comparisons to Hormel

Industrial Logic for a Business Separation

• We believe there are highly-compelling industrial reasons to pursue a separation of the Bob Evans Restaurants and BEF Foods businesses
  • There are few synergies between Bob Evans Restaurants and BEF Foods
  • BEF Foods operates independently and has a separate management team
  • The new CEO Saed Mohseni is an expert in restaurant operations but has little apparent packaged foods experience
  • The presence of BEF Foods serves as a distraction which may hinder the ability of Mr. Mohseni to focus his efforts on the under-performing restaurant business
  • A separation of the two businesses would allow management of each business to be incentivized with equity directly tied to the performance of each segment
  • There may be revenue dis-synergies associated with a packaged foods business and a restaurant business under one corporate umbrella, as the ability of BEF Foods to sell product to other restaurant chains may be hampered
  • The investor universe for Bob Evans stock is constrained, as most equity analysts that cover food products companies do not cover restaurants, and vice-versa, leading investors to avoid Bob Evans, as it is neither a pure play in restaurants or packaged foods

Commentary

“The same market forces that have sent former Bob Evans and Bravo Brio patrons to faster, cheaper and more convenient options like Wendy’s and Panera are also apparent in grocery stores, said John Rand, senior vice president of retail insights at Kantar Retail. “Refrigerated side dishes are a huge time saver at what is perceived as moderate expense,” Rand said. And to Gordon’s point that the two Bob Evans’ divisions have diverged: At the grocery store, the brand name doesn’t matter; product perception is everything in the cold case, Rand said. “The restaurant’s own brand may be largely irrelevant. It may assist early trial and adoption, but the item has a stand-alone value even if a shopper is not particularly aware of the restaurant chain,” Rand said.” (emphasis added)

– The Columbus Dispatch, 2/5/16

“It is time to sell the division now that a new CEO, Saed Mohseni, is on board, said John Gordon, a food and beverage analyst and principal of Pacific Management Consulting Group. Gordon sees all those side dishes as a distraction. In his view, Bob Evans’ core business is restaurants and needs the company’s full attention.”

– The Columbus Dispatch, 2/5/16

See the full slides below.