Bob Evans Farms Could Enhance Shareholder Value With a Business Restructuring

Any plunge of a particular stock gets my attention, as it could indicate a good buying opportunity. Recently, full-service restaurant chain Bob Evans Farms (NASDAQ: BOBE  ) has dropped significantly, from nearly $59 per share in October to only $47 per share at the time of this writing.

Moreover, it is facing shareholder activism, initiated by Sandell Asset Management. Sandell mentioned that Bob Evans should restructure the business to unlock potential shareholder value. Its peers, such as Darden Restaurants (NYSE: DRI  ) and Cracker Barrel Old Country Store (NASDAQ: CBRL  ) , have also been pressured by activist investors to make changes to deliver better value to shareholders.

BEF Foods is a drag on Bob Evans Farms' overall business
Bob Evans Farms operates in three main business segments: Bob Evans Restaurant, Mimi's Café, and BEF Foods. Among the three, the Bob Evans Restaurant business is the biggest revenue and profit contributor to the company, generating more than $981 million in sales and nearly $75.6 million in operating income. The company successfully completed the divestment of Mimi's Café to Le Duff America for around $50 million in early 2013.

The BEF Foods segment, which is the retail food-products business, remained a significant drag on the company's overall profitability. BEF Foods swung from $20.5 million in operating income in 2012 to a huge loss of nearly $137.5 million in 2013, driving the whole company into a loss of nearly $44 million. BEF Foods' operating loss was caused by the extinguishment of inter-company debt of nearly $157 million when the business converted restaurant operating entities into a limited liability company. BEF Foods was also challenged by high sow costs, which is the most important raw material for pork sausage production. According to the company's 10-K filing, its BEF Foods segment relied on a limited number of suppliers and also a small number of customers.

Sandell Asset Management, which owns a 6.5 % stake in the company, has been pushing Bob Evans Farms to make three major changes to its business, including selling the food business, divesting some of its real estate to lease back, and returning cash to shareholders by initiating share buybacks. Sandell believes that if Bob Evans made all those three strategic steps, it could generate as much as $1.1 billion in proceeds and should use 75% of those proceeds to purchase shares in the market. It believes that Bobs Evans could be worth in the range of $73-$84 per share, implying a 9 times its forward EBITDA (earnings before interest, taxes, depreciation, and amortization).

Activist investors also want to restructure Darden and Cracker Barrel
Both Darden Restaurants and Cracker Barrel also received pressure from activist investors to restructure their businesses. In the case of Cracker Barrel, Biglari Holdings, with a 19.9% stake, has urged the company to pay a $20 per share special dividend. Biglari mentioned that a $20 per share special dividend, equivalent to the total capital outlay of $476 million, could be confidently financed. At the current trading price, Cracker Barrel offers its shareholders a decent dividend yield at 3%, with a payout ratio of 49%. A special $20 per share dividend would also yield an additional 20.7% for shareholders.

Darden Restaurants was urged by activist investor Barington Capital to separate the Red Lobster and Olive Garden restaurant chains, monetize the company's real estate assets by creating a publicly traded REIT, and cut costs to compete better. If Barington Capital's ideas were fully implemented, it believes Darden should be worth around $69-$76 per share. Another big activist investor in the company, Starboard Value, wants Darden to delay the company's plan to spin off Red Lobster, because it thought a Red Lobster separation could hinder the company's ability to fully realize real estate value and could destroy shareholder value substantially. Darden, at the current price, yields as much as 4.4% in dividends to shareholders.

My Foolish take
Indeed, Bob Evans' BEF Foods business exposes the company to significant risks, including the high volatility of sow costs, a limited number of suppliers, and also a high level of customer concentrations. Thus, it would be desirable for Bob Evans Farms' shareholders if the company divests that business to focus its management efforts on the remaining Bob Evans Restaurant segment.

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