By Alex Gavrish, Etalon Investment Research | Author of “Story Investing”
Despite Bob Evans Farms’ story structure and activist shareholder’s efforts, three year total shareholder’s return is not attractive
Despite positive coverage in the media about reportedly successful activist investor campaign at Bob Evans Farms Inc, I think one can hardly call this a success.
Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”
"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More
Bob Evans Farms share price rose only 20.1% over past three years (including dividends). So much noise and effort and only a 20% return in three years? I would not call it a success. Certainly not a huge investment success. I wrote about Bob Evans back in January of 2014 and noted that there is just not enought value and “meat” in the company.
Bob Evans Farms
One can easily notice that in many companies activists invest in, there exists a good story structure. Meaning that just as in any good story or movie, in company’s life cycle there is a certain (often) three part story structure of complication, development and resolution.
Activist shareholders usually correctly identify this structure and often aim to join the party at the beginning of the resolution stage. It seems that in case of Bob Evans Farms activist shareholder correctly identified this structure overall.
I think the main idea here was that company incured significant capital expenditures over past few years and invested a great deal of capital into expansion of the packaged food business segment but even more importantly into redesign and improvements of restaurants network.
At some point these investments were supposed to bear fruits and shareholders would enjoy the returns. But two weeks ago company announced that it will sell Bob Evans Restaurants to private equity firm Golden Gate Capital for $565 million plus assumption of certain net working capital liabilities. Company expects to receive net proceeds of $475 to $485 million from the sale.
Activist’s initial proposal three years ago was to spin-off or sell packaged food division, and extract value from company-owned real estate via sale-leaseback transactions and repurchase shares. All these were done in one way or another but first, it took three years and second, company sold restaurants business after a lot of funds were invested into it.
It might be a good thing for shareholders if restaurants business is weak but in the meantime it looks like it is a good deal for private equity firm as they purchase business exactly when large capital investment program was completed and restaurants are in a good shape.
So the question is if there is any value currently left for shareholders of Bob Evans Farms?
I think that recently announced transaction to sell restaurans business completely changes investment thesis and story of Bob Evans Farms. There is only packaged food business left. Company also announced an acquisition of Pineland Farms Potato Company for $115 million. The acquisition will increase company’s production capacity and provide company with potato processing facility positioned in proximity to large areas of potato production.
According to President and Chief Executive Officer Saed Mohseni, following the completion of both transactions “Bob Evans will be focused exclusively on sales and profit growth of BEF Foods”
Company plans to pay shareholders a special dividend of $150 million or $7.5 per share. Based on a recent share price and after adjustments for all the transactions and a special dividend, company has a market capitalization of $978 million, net debt of $97 million (assuming $480 million in net proceeds from sale of restaurants and assumption of $45 million in working capital liabilities, payment of $115 million for Pineland Farms Potato Company, and payment of a special dividend of $150 million), and an enterprise value of $1,075 million. For fiscal 2018 Bob Evans provided guidance of $470 million in revenues and $105 million in EBITDA. Based on these figures, company is currently valued at an EV/EBITDA valuation multiple of x10.2.
This valuation is not especially attractive, but reasonable. It remains to be seen how company performs after changing its focus from restaurants to exclusive focus on packaged foods. I still believe that there is not enough “meat” in this company for investors. Relatively small size of packaged foods business will make the share price highly dependend on perfect execution and achieving stated growth targets.
In the meantime, investors might be better off staying on the sidelines.