Sandell 'Encouraged' By Bob Evans Farms (BOBE) CEO Recent Comments

September 12, 2016 9:05 AM EDT

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Sandell Asset Management Corp., a large and long-time shareholder of Bob Evans Farms, Inc. (NASDAQ: BOBE), today released the following statement:

“We are encouraged by recent comments made by Saed Mohseni, the CEO of Bob Evans, in the Company’s FY2017 First Quarter Conference Call. On this call, Mr. Mohseni confirmed that the Board “continues” to be in the process of evaluating “all options for creating shareholder value” and is being “professionally advised” in such a process. Furthermore, the remarks by Mr. Mohseni served to finally quash the excuse previously advanced for avoiding a separation of Bob Evans Farms Foods (“BEF Foods”) and Bob Evans Restaurants (“Restaurants”), by confirming the absence of meaningful synergies as well as affirming the true independence of these two businesses.

While we are heartened by Mr. Mohseni’s statement that “we [Bob Evans] continue to work with [a] top-rated financial group to advise the board on the options for Bob Evans,” and that we should be “assured that a top-rated financial institution that guides some of the best minds in the business…continue[s] to work toward finding the best solution for our shareholders,” we believe that the skepticism surrounding the Company’s statements requires Bob Evans to be more transparent about its financial advisors and overall process. Recent remarks from certain sell-side research analysts appear to question the Company’s commitment to consummate a separation and seem to imply that Bob Evans is engaged in a ploy to buy itself time. While we take Mr. Mohseni’s words at face value and do not doubt the veracity of his comments, we believe that Bob Evans should provide details regarding the identity of its financial advisors and their level of engagement in order to refute these implications.

From a broader perspective, the research commentary that we have seen highlights one of the problems that has long-plagued Bob Evans, namely the fact that the Company continues to be viewed as a restaurant company by investors because there are no packaged foods analysts following Bob Evans, even though close to half of the Company’s EBITDA is generated by BEF Foods. We have had discussions with food industry specialists from four highly-respected investment banking firms over the last 12 months, the most recent of which opined that an indicated valuation for BEF Foods could range from between $1.01 billion and $1.36 billion. We are inclined to give more weight to the opinions of industry experts whose responsibility is to facilitate transactions amongst parties in the packaged foods space than the opinions of individuals who are primarily focused on other industries.

What we find somewhat troubling is the lack of evidence cited in certain research reports to argue that a separation of BEF Foods and Bob Evans Restaurants would not create significant value. As such, we seek to expand upon the material that we publicly released on August 26 in order to better substantiate our belief that a separation could result in a value as high as $66 per share, which is approximately 65% higher than the current stock price of around $40 per share. We reiterate that we do not specifically advocate one option over the other but believe that the following are some taxably-favorable options available to Bob Evans: (1) a spin-off or split-off of BEF Foods; (2) a “Sponsored” spin-off of BEF Foods; (3) a “Reverse Morris Trust” with BEF Foods or Bob Evans Restaurants; and (4) a Separation of Bob Evans Restaurants by way of a spin-off (or sale for that matter). While we will not expand on all of these options, a further examination of a spin-off of BEF Foods as well as a separation of Bob Evans Restaurants is presented below:

Spin-Off of BEF Foods

Restaurants BEF Foods

Assumptions ($MM)

(BOBE)

(Spin-Off)

Total

Segment EBITDA $100.0 $90.0 $190.0
Corporate Overhead (45.0) (8.0) (53.0)
Additional Reporting and Other Costs

0.0

(5.0)

(5.0)

Total EBITDA $55.0 $77.0 $132.0
Multiple 7.0x 14.0x
Asset Value $385.0* $1,078.0 $1,463.0
Add:
Cash 0.0 4.4 4.4
Closed Restaurant Sale Proceeds 20.0 0.0 20.0
Less:
Debt (Apportioned Between Segments)

(165.0)

(199.6)

(364.6)

Equity Value $240.0 $882.8 $1,122.8
Shares Outstanding 19.8 19.8 19.8
Implied Value per Share $12.15 $44.68 $56.82
* We dispute this low valuation but include it as a data point solely for illustrative purposes

As can be seen, a spin-off of BEF Foods, factoring in both corporate overhead (200 bps of shared service costs, or approximately $8 million) and $5 million of additional reporting and other costs, could yield a combined stock price of approximately $57 per share, which is over 40% higher than the current price of around $40 per share. It is important to note that we believe that the $385 million value of the Restaurants segment, which results from applying a 7.0x multiple to EBITDA, is absurdly low considering that Bob Evans still owns the land and building to over 300 of its restaurants. Notably, the analysis of a leveraged acquisition of Restaurants by way of bank debt and real estate financing implies that a $385 million valuation would allow a private equity firm to acquire Restaurants for “free” and thus without investing one dollar of equity capital. Such a value is not much higher than the $300 million that we believe Bob Evans would receive were it to shut down all its operating restaurants, which we do not advocate, and sell the underlying “bricks and mortar (and land).” Indeed, the Company expects to receive $20 million for 21 closed locations, or nearly $1 million for each non-operating property.

Separation of Bob Evans Restaurants

A transaction that separates the Restaurants business from the parent company Bob Evans is another intriguing option that could create even more value. If Bob Evans were to separate Restaurants by way of a Restaurants spin-off (or sale, for that matter), the existing parent company Bob Evans (BOBE) would in essence become the stand-alone BEF Foods business and thus a pure-play packaged foods company. As such, an acquisition of the stock of the parent company Bob Evans (BOBE) could take place immediately after the closing of the spin-off (or sale) of Restaurants. In this way, corporate taxes on a sale of BEF Foods could be avoided. Because the less complicated path to completion would involve the sale of Restaurants (as opposed to its potentially tax-free spin-off), however, there would likely be corporate taxes on the sale of Restaurants. Given the fact that there is a significant amount of land at Restaurants, which does not depreciate for tax purposes, as well as a fair amount of recent spending on PP&E, which has not been fully-depreciated, it is our belief that the tax basis of Restaurants may be in the vicinity of $380 million. As such, any taxes paid on the sale of Restaurants would be quite manageable.

Assumptions ($MM)

LBO of Restaurants $560.0
Estimated Tax Basis of Restaurants 379.3
Tax Rate 35.0%
Taxes on Sale of Restaurants 63.2
Net After-Tax Proceeds from Sale of Restaurants $496.8
EBITDA of BEF Foods $90.0
Less:

Assumed Corporate Overhead

(8.0)

Pro-Forma EBITDA of BEF Foods $82.0
Multiple 14.0x
Implied Value of BEF Foods $1,148.0

Value to BOBE Equity

Net After-Tax Proceeds from Sale of Bob Evans Restaurants $496.8
Implied Value of BEF Foods 1,148.0
Cash 4.4
Closed Restaurant Sale Proceeds

20.0

Total Asset Value 1,669.2
Less:
Debt

(364.6)

Equity Value $1,304.6
Shares Outstanding 19.8
Implied Value per Share $66.02

In the above analysis, a private equity firm could generate a 5-year IRR of greater than 20% in a no-growth scenario by purchasing the Restaurants business for $560 million in a leveraged acquisition. While such calculation incorporates a number of assumptions, we believe this transaction could easily be financed by many private equity firms through a highly-conservative combination of $100 million in bank debt and $300 million in net proceeds from sale-leaseback financing at an 8% cap rate, along with $160 million of equity. Such a transaction, followed by the effective purchase of BEF Foods for an implied value of $1.15 billion by way of an acquisition of the stock of the parent company Bob Evans (BOBE) would yield a value of approximately $66 per share, which is about 65% higher than the current price of around $40 per share.”



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