Bob Evans Farms Extends Olive Branch to Activist Investor

Try as it might to reach an amicable resolution, Bob Evans Farms (NASDAQ: BOBE  ) can't get activist shareholder Sandell Asset Management to meet it halfway. The family dining chain said yesterday that it had offered the private equity firm two seats on the board of directors in a bid to end a costly proxy battle. However, it said it was rebuffed by the hedge fund operator, which wants four of its nominees appointed to the board and full adoption of its agenda.

The clash centers on competing visions. On one hand is Bob Evans Farms, which runs a chain of 562 casual-dining restaurants across 19 states, along with the vertically integrated BEF Foods, a leading producer and distributor of pork sausage products and complementary food items that accounts for 30% of total company revenue.

On the other hand is Sandell, which wants the restaurant chain to spin off or sell the packaged foods division, believing the company is suffering from a "conglomerate discount" because of the divided attention the competing businesses require. Although boards and activists can have different views of how a company should operate, the hedge fund charges that the Bob Evans Farms board has acted imperiously, preferring to preserve its own power base at the expense of common shareholders.

The PE firm points to the 80% supermajority requirement the board imposed to amend the bylaws. Shareholders had that threshold in 2011 and voted to remove the impediment to reform, but the board unilaterally reimposed the requirement. Sandell also said the offer of only two board members out of 12 would be insufficient representation. (Bob Evans points out that over the past two years it has appointed four directors who are considered "independent.") 

It should also be noted that two directors are already retiring from the board; Bob Evans has only nominated a slate of 10 candidates, so regardless of whether Sandell agrees to the offer, it will still nominate two candidates anyway. The restaurant's offer certainly has the appearance of being a gesture with little effect or value.

Casual-dining restaurants have faced difficult economic conditions since the onset of the recession. Only their fast-casual counterparts have recorded any growth, and that has led to conflicts between activist investors agitating for a shake-up of operations to break these companies out of their lethargy and boards that have their own ideas on how to turn the business around.

The obvious parallel to Bob Evans Farms is Darden Restaurants (NYSE: DRI  ) , where the board is selling its troubled Red Lobster business while ignoring activist calls to also unload the Olive Garden chain. Both concepts have suffered from steep declines in customer traffic, but where hedge funds view the Italian eatery as every bit a millstone around the restaurant operator's neck as the seafood chain, the board and management see it as a turnaround opportunity.

As a result, Darden has ignored shareholders' calls to at least postpone the divestiture of Red Lobster and is rushing headlong to the July sale date. Investors charge management with being so intent on selling the chain before shareholders gather at their annual meeting in September that it is willing to shed it at a steep discount. The board at Darden also faces a proxy fight, with private equity firm Starboard Value nominating a full slate of candidates to replace the current officeholders.

Bob Evans Farms has cast its fight with Sandell Asset Management in a light most favorable to itself, sounding reasonable against a strident opponent. Despite performing better than many of its peers over the past few years, Bob Evans Farms' actions in recent periods have eroded profits and sent the stock lower. With the company engaged in actions hostile to shareholder interests, having truly independent members have a greater say on the board might not be such a bad idea.

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