Activist Investor Squares Off Against Bob Evans Farms

If at first you don't succeed, try, try again. That old saw seems to apply to hedge fund Sandell Asset Management, which, after being twice rebuffed by management of Bob Evans Farms (NASDAQ: BOBE  ) to do something dramatic, like a spinoff of its packaged food business or a sale-leaseback arrangement for its company-owned restaurants, has filed a lawsuit that accuses the board of attempting to strip shareholders of their rights.

The activist shareholder owns a 6.5% stake in the restaurant operator and filed suit after Bob Evans unilaterally imposed a requirement that an 80% supermajority be obtained before investors can make amendments to company bylaws. In a press release, hedge fund CEO Thomas Sandell called the move "outrageous" in that it came less than three months after shareholders had overwhelmingly voted to reduce such a supermajority requirement to a simple majority threshold.

A largely stagnant restaurant market is causing restlessness among shareholders who have been agitating for change to spice up performance at various companies. In addition to Bob Evans, we've seen large investors pressuring boards at Cracker Barrel (NASDAQ: CBRL  ) , Darden Restaurants (NYSE: DRI  ) , and DineEquity (NYSE: DIN  ) , among others.

Sardar Biglari's Bigalri Holdings has been routinely critical of Cracker Barrel's capital allocation policies, though it's pestered the board for a big special dividend as opposed to spinning off the company store. Persistence did pay off for Marcato Capital Management, which got DineEquity to start paying out dividends of $3 per share a year. That was half of what Marcato wanted, but enough to attract another activist shareholder, Scout Capital Management, which now wants the owner of IHOP and Applebee's to start thinking about its "capital structure, debt refinancing, timing and magnitude about share repurchases, management compensation metrics and merger and acquisition strategies."

And Barington Capital Group has achieved a modicum of success by getting Darden to consider spinning off its Red Lobster chain, although it also wanted the restaurant group to shed the Olive Garden concept.

Part of the problem for restaurants these days has been a squishy consumer, still too concerned about the economy to open his or her wallet to eat out all that often. The only place consumers feels comfortable right now is at a fast-casual restaurant where a balance between price, quality, and speed is delicately achieved.

The market watchers at NPD Group say restaurant traffic remained flat throughout 2013, even though the quick-serve restaurant space -- which covers both fast food and fast casual -- enjoyed an 8% jump in traffic for the 12-month period ending in September. That means the rest of the restaurant market, including casual dining, mid-scale, and family dining, haven't had any gains at all, and even experienced sharp declines, despite being very promotional.

Sandell's lawsuit seeks to strike down Bob Evans' supermajority rule and is separately pushing for a consent solicitation that gives it the right to have all shareholders vote on a proposal without waiting for the next annual meeting. It promises to follow through on that measure regardless of how the lawsuit goes and will seek to expand the board of directors and fill those new slots with individuals "who are more focused on delivering value to the shareholders."

Although activist hedge fund operators at times can seem like they're throwing tantrums to gain attention, reining in an imperial board is sometimes a necessary tactic to get management to pull up a chair at the table. However, the air between Sandell Asset Management and Bob Evans Farms seems far too poisoned at the moment for any constructive conversation to unfold, meaning the only meal to be served up here will be a plateful of crow.

A heaping mouthful
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