Could This Restaurant Become a Tasty Spinoff?

We've seen restaurants calve off operations before. McDonald's spun off Chipotle Mexican Grill, which in turn turned out a Southeast Asian concept called ShopHouse. And a few years ago, some investors were pushing for the Golden Arches to separate its franchise business from its company-owned stores.

Carrols Restaurant Group, the large Burger King Worldwide franchisee with more than 300 locations, spun off both its Pollo Tropical and Taco Cabana concepts that are now run under the Fiesta Restaurant Group umbrella.

Source: Bob Evans Farms.

One-stop shopping
But those are restaurants operating restaurants and turning them out to give them a life of their own. There aren't all that many that also run a packaged foods business, and one investor thinks it's high time Bob Evans Farms (NASDAQ: BOBE  )  separated its chain of restaurants from the part that sells packaged meats, potatoes, and other convenient meal ingredients.

In a filing with the SEC, Sandell Asset Management, which owns 5.1% of the restaurant chain's stock, claims its shares are selling at a discount because it's weighed down by having to serve two masters, neither of which are performing well.

In fiscal 2013, which ended this past April, the BEF Foods division realized almost $377 million in sales, representing 23% of the restaurateur's total revenues, yet it recorded $137 million in operating losses, causing a consolidated loss of $44 million loss for the year, a big swing from the $107 million profit the year before. 

Age of empire
Sandell says Bob Evans is suffering from a "conglomerate discount," with shares of the restaurant chain trading at a discount not only to its restaurant peers, but to those in the packaged food industry as well. While there are certain benefits to this vertical integration -- the foods division sells some products to its own restaurants as well as to others -- they aren't large enough to overcome the problems, and touting them as management has done is more in the name of preserving the chain's empire-building fantasies than reality.

When you compare Bob Evans' stock performance to that of its closest rival, Cracker Barrel (NASDAQ: CBRL  ) , the competition's stock has soared 248% over the last five years while Bob Evans' shares haven't even doubled. 

Cracker Barrel itself has been pestered by an activist shareholder, Sardar Biglari, whose Biglari Holdings has been trying to shake up management, though largely unsuccessfully. Notably, however, Biglari isn't pushing for a divestiture as Sandell is, but that may be because Cracker Barrel's retail business is successful. It generated $517 million in retail sales last year, equal to about 21% of its total $2.4 billion in revenues. The company's also reduced its long-term debt over the last five years from $764 million down to $505 million, while increasing cash on hand from $12 million to $152 million.

While Bob Evans has done a good job of reducing its debt load, cutting it in half since 2009, two-thirds of its cash balances have also been frittered away, leaving it with just $6 million in the bank as of the end of the last quarter.

What Sandell wants to happen is to split the company in two, one part focusing on restaurants, the other on food. It believes if the food business were spun off it could trade at 10 times its EBITDA, similar to other packaged foods companies like Campbell SoupConAgra, and Hormel, but were it to be sold, it would command an even higher premium considering the M&A environment. Ralcorp's acquisition by ConAgra, for example, valued the company at 12.5 times EBITDA, while Warren Buffett's Berkshire Hathaway took H.J. Heinz private at 14.3 times EBITDA.

In addition to the spinoff or sales of the foods business, Bob Evans ought to enter into sale-leaseback arrangements for its 482 restaurants, which could conservatively generate as much as $720 million. There's no reason for the restaurant owner to also be a landlord.

Last, the investor says Bob Evans could raise nearly $1.1 billion by engaging in a repurchase of its stock through a self-tender offer, where a company buys back its own stock for a price well above fair market value. Sandell recommends $58 a share. 

There's a lot to merit in the proposal by the asset manager. Taken together, the proposals would make Bob Evans a pure-play restaurant stock with a simplified corporate structure and a significantly reduced share count. Though if Sandell is to be believed, Bob Evans has more of a history in entrenching management than in toppling thrones. The restaurant chain did say, however, that it welcomed receipt of the proposal and will take it under advisement.

As tasty as this spinoff might be, that sounds to me like we won't be pulling up a chair to this buffet anytime soon.

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