Bob Evans Farms to stay the course

by Keith Nunes
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NEW ALBANY, OHIO – This past September Sandell Asset Management Corp., a shareholder in Bob Evans Farms, Inc. proposed three strategies the food service company could employ to increase shareholder value. On Dec. 4, in a conference with financial analysts to discuss Bob Evans’ fiscal 2014 second quarter earnings, Steve Davis, chairman and chief executive officer, outlined why the three proposed strategies were bad ideas.

The three strategies recommended by Sandell Asset Management included spinning off the food business; unlocking the real estate value embedded in Bob Evans’ many owned restaurant properties through a sale-leaseback transaction; or implementing a large self-tender with most of the proceeds generated from the first two recommended strategies.

“With respect to a sale and lease back of a significant portion of our restaurants, we take the position that the sale and lease back of our real estate is essentially a financing strategy and would, one, be one of the most expensive forms of financing we could take on relative to other forms of debt we can access,” Mr. Davis said. “Two, it would significantly reduce the flexibility we now have to remodel our restaurants and shutter poor performing restaurants, a key factor in the historical and long-term success of our restaurant business. And three, it would impose large cash lease expense obligations subject to annual increases that would reduce our future cash flow and financial flexibility. We, like many other restaurant companies, believe owning our real estate puts us in a better position to borrow on attractive terms now and in the future.”

With regard to spinning-off the company’s food business, Mr. Davis said that the company has invested more than $100 million in acquisitions and plant expansions. With the efforts being finalized, Bob Evans Farms is on track to achieve 250 basis points of margin expansion during fiscal year 2015, Mr. Davis said.

He added that the food business has “significant synergies” with the company’s restaurant business and that the synergies are going to be enhanced following the investments in acquisitions and supply chain optimization.

“This shareholder indicated that the purpose of these transactions was to enable a very large tender for our outstanding shares,” Mr. Davis said. “We believe our record and commitment of returning capital to shareholders is self-evident. First, we expect to have returned over $800 million to shareholders from the beginning of fiscal 2007 through the end of this fiscal year. And we expanded our current fiscal year share repurchase program by $50 million for a total of expected share repurchase of $225 million this fiscal year contributing to an approximate one-third reduction in our share count since 2007. Second, we recently increased our dividend by 12.7% and have doubled the dividend since 2009.”

Finally, Mr. Davis said Bob Evans’ board of directors has vetted the suggestions made by Sandell Asset Management and found them to not be in the best interest of the company or shareholders.

For the second quarter ended Oct. 25, Bob Evans Farms’ net income fell to $6,119,000, equal to 23c per share on the common stock, down from $11,311,000, or 40c per share, during the second quarter of fiscal 2013. Sales for continuing operations ticked up slightly to $332,600,000 when compared with sales for the same period of the previous year of $329,555,000.

The food business posted a loss of $3,017,000 during the quarter. High sow prices, which feed the company’s sausage business, and costs related to a dispute with a supplier, were the primary causes of the loss.
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