Sandell Asset Indicates Plans to Launch Bob Evans Farms (BOBE) Consent Solicitation

October 6, 2016 8:01 AM EDT

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Sandell Asset Management Corp. a large and long-time shareholder of Bob Evans Farms, Inc. (NASDAQ: BOBE) released the following letter to the Board of Directors of Bob Evans noting its intention to conduct a consent solicitation:

October 6, 2016

The Board of DirectorsBob Evans Farms, Inc.8111 Smiths Mill RoadNew Albany, OH 43054

Ladies and Gentlemen:

As one of the largest shareholders of Bob Evans for a number of years, you should by now fully appreciate the level of our conviction in the significant underlying value of the Company, as well as our unwavering commitment to seeing this value delivered to all of the shareholders of Bob Evans. In spite of some distinct corporate governance enhancements and other notable improvements following the Company’s 2014 Annual Meeting, we have profound concerns regarding the continued disconnect between the Company’s stock price and the value associated with its two independently-operated business segments, Bob Evans Restaurants and BEF Foods. This disconnect has grown more pronounced in recent months and the near-universal investor skepticism that surrounds Bob Evans has forced us to take this public step of embarking on the path of seeking shareholder action by written consent. We are taking this step only after exhausting every other reasonable, conceivable option available to us, having expended significant efforts over the course of many months seeking, but unfortunately failing, to have the Company embrace greater public transparency.

While rudimentary, it first bears mention that “shareholder value” for a publicly-traded company is indicated by its stock price. This goes for all publicly-traded companies, and whether one deems this standard fair or unfair, the economic reality of the public markets is that a company’s stock price serves as the ultimate benchmark in determining whether “shareholder value” has been created or destroyed. And notwithstanding the presumed best efforts of all members of the Bob Evans organization, shareholder value on an absolute basis has actually been destroyed over the last three years, as the Company’s stock price is 34% lower than three years ago, as the following graph illustrates:

We can take no comfort in the many claims made by the Company that it is focused on “increasing shareholder value” when the stock price paints a starkly different picture.

And the Company cannot excuse this performance as consistent with the industry, as the stock of Bob Evans has demonstrated material and sustained underperformance as compared to peers. The following graph illustrates how the stock price of Bob Evans has underperformed a select peer group of restaurant companies by 41% over the last three years:

Not only has the stock price of Bob Evans underperformed its restaurant peers, but it has underperformed a select peer group of packaged foods companies by an even greater amount, 94%, in the same time frame, as illustrated by the following graph:

At its recent stock price of approximately $38 per share, the market value of Bob Evans is approximately $750 million, and with approximately $360 million of net debt, the enterprise value of the Company is approximately $1.11 billion. This means that “the market is saying” the entire Company, namely the operations of BEF Foods and Bob Evans Restaurants, as well as the 300+ wholly-owned parcels of land and buildings underlying the Company’s owned restaurants, is worth $1.11 billion. We believe that this is an affront to all financial sensibilities when one considers that the value of BEF Foods alone may approach $1.2 billion. We have provided voluminous detail, backed up by discussions that we have had with a number of highly-respected investment banking firms, justifying a high valuation for BEF Foods. Even the Company’s own CEO, Saed Mohseni, on the Bob Evans FY2016 3Q earnings call, stated that, “If the food division was by itself [it would be] probably trading to your point, 14.0x, 15.0x.” Applying a 14.0x multiple to the $90 million of segment EBITDA that BEF Foods generated in Fiscal 2016 suggests a value for BEF Foods of $1.26 billion.

Unfortunately, even though BEF Foods may be worth more than the enterprise value of the entire Company, the stock price of Bob Evans continues to be overwhelmingly impacted by the Company’s Restaurants segment. Furthermore, the few sell-side analysts who follow the Company are primarily focused on the restaurant industry, and there are no packaged foods analysts who follow Bob Evans. It is painfully ironic that Bob Evans continues to be treated as a restaurant company when the stock price of the Company is actually reflecting a negative value for its Restaurants segment. It should be very obvious that the continued joinder of these two disparate operating segments under one corporate umbrella has been destructive to shareholder value as measured by the Company’s stock price, which we reiterate is essentially the only metric that indicates the value of a publicly-traded company.

It has long been our contention that investors will continue to afford the stock of Bob Evans a material discount as long as the Company refuses to formally commit to a separation of Bob Evans Restaurants and BEF Foods. We believe that talk of waiting for the Restaurants segment to turn around is a facile excuse for not pursuing a separation. Furthermore, and irrespective of the performance of the Restaurants segment, this line of thinking blatantly ignores the persistent, pronounced and growing value differential between publicly-traded restaurant companies, which trade at around 8.0x EBITDA, and many packaged foods companies, which trade at closer to 14.0x EBITDA.

Adding what would seem to be indisputable evidence arguing in favor of a separation is the recent confirmation by Mr. Mohseni himself of the absence of meaningful synergies between the two businesses as well as the affirmation of the true independence of these businesses. This, coupled with the extensive analysis that we have conducted based on advice received from some of the most knowledgeable tax experts in the United States, convinces us that there are several possible alternatives that the Company could pursue to effect a tax-favorable separation of BEF Foods and Bob Evans Restaurants.

Though we have sought to discuss these matters with members of management and the Board of Directors on numerous occasions, what now brings this issue to the forefront is the fact that the many pronouncements by Saed Mohseni regarding the Company’s avowed process of evaluating “all options for creating shareholder value” are being completely discounted by the investment community. Fueling investor skepticism is the lack of transparency regarding matters as basic as the identity of the Company’s financial advisors, as the only information that Mr. Mohseni has provided is the hyperbolic claim that Bob Evans is working with “a top-rated financial institution that guides some of the best minds in the business.” Rarely, if ever, have we seen such investor skepticism surrounding a company, with this skepticism heightened by the opacity of the true intent of Bob Evans. So great is the level of disbelief that certain sell-side analysts have suggested in so many words that Bob Evans is engaged in a ploy to buy itself time, the subtext being that Mr. Mohseni’s comments are cynical throwaway lines meant to mask the fact that the Company has no intention of pursuing a separation of its two businesses.

While we have taken Mr. Mohseni at his word, we are concerned that this opaque process of evaluating “all options” may be far from robust. Indeed, we have spoken with a number of investment banking firms who have indicated that there would be many tax-favorable separation options for the Company to pursue, with an array of financial and strategic parties with whom the Company could partner, and yet Bob Evans has not been proactive in engaging in dialogue with these potential financial and strategic parties. We find it hard to believe that any company that is truly evaluating “all options” and is being advised by a firm that “guides some of the best minds in the business” would conduct a process that in our opinion is so apparently flawed.

All of which brings us to a very important point which appears to be lost on the Board, namely the fact that unless a company has publicly committed to pursuing alternatives to maximize shareholder value and named its financial advisors, there could literally be dozens of interested parties who will not approach such a company to discuss a possible transaction. Whether public expressions that Bob Evans intends to look at “all options” to enhance value are genuine or not, almost no financial or strategic party is going to proactively approach Bob Evans and spend the time and money involved in seeking to effect a transaction when the Company has not demonstrated a full commitment to pursuing some form of a transaction.

While we have repeatedly sought to keep our dialogue with Bob Evans both cordial and private, recent discussions with the Company have proved frustrating. We, in fact, were prepared to sign a non-disclosure agreement (NDA) with Bob Evans so that we could have an open exchange that might assuage our concerns, but the Company refused. With no conceivable options left, we are forced to take our concerns public. We intend to ask our fellow shareholders to take action by written consent and to vote in favor of a very straightforward precatory proposal recommending that the Board of Directors publicly commit to a transparent process leading to the separation of BEF Foods and Bob Evans Restaurants or another alternative that maximizes shareholder value, naming the investment banking firm that will assist the Board in this process.

While precatory proposals by their definition are non-binding, it should be noted that in addition to voting on precatory proposals, the Company’s organizational documents have real “teeth” that provide shareholders a great deal of influence if the Company ignores their wishes. Notably, shareholders have the ability to remove Directors at any time without cause and can amend the Company’s Bylaws with a simple majority vote, which hypothetically could allow shareholders to remove certain Directors as well as add new Directors. Because shareholders can take action by written consent, all of this and more can be done essentially at any time and well outside of the confines of an annual meeting. Notwithstanding these very powerful tools available to shareholders, it is our hope that the Company would not ignore the will of the shareholders, making further action aimed at altering the composition of the Board unnecessary.

While we would much prefer not to expend the significant amount of time and effort involved in a consent solicitation, the Company’s shareholders cannot afford the continued erosion of value to persist. As recently as one week ago we had a discussion with Mr. Mohseni and other members of the Board, at which time we made one last-gasp attempt to avoid the needless distraction of a consent solicitation. Indeed, we made absolutely no demands as to what form the separation must take and, in fact, we were quite clear that we are very open to another alternative that would maximize shareholder value, even if such alternative did not involve a separation. All we asked was that Bob Evans formally commit to pursuing a transparent process, which is completely within the control of the Company and could be effected immediately.

Needless to say, we are monumentally disappointed that the Company did not see fit to grant our very straightforward and actionable request, which we find somewhat astonishing considering that we are in an investment environment that demands greater and greater transparency. While the Board can still take action at any time to avoid the cost and distraction that a consent solicitation is likely to engender, until such time we intend to proceed with a solicitation with the ultimate goal of enhancing value for all of the shareholders of Bob Evans.


Thomas E. SandellChief Executive Officer

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