Why There Are No Winners in the Bob Evans Power Struggle


Source:  Bob Evans Farms

Recently, Bob Evans Farms (NASDAQ: BOBE) CEO Steve Davis stated during the earnings conference call, "Many of our investors have asked is there a way to settle [with] Mr. Sandell instead of engaging in a costly, divisive proxy contest."  The "Mr. Sandell" he is referring to is Tom Sandell, CEO of Sandell Asset Management.

Sandell has been in talks since late last year that have led to a proxy battle for control of Bob Evans. While the eventual outcome is still unknown, what we do know is victims of the crossfire are the restaurant chain's own shareholders.

Raiding the piggy bank
Bob Evans reported its fiscal fourth-quarter results on July 8. Along with disappointing results, the company lowered its fiscal 2015 guidance. It previously was expecting earnings per share of between $2.80 and $3 and has now lowered it to between $1.90 and $2.

One of the large costs that is causing the company to lower its guidance is the proxy battle with Sandell; Bob Evans' earnings release stated, "Costs associated with responses to an activist stockholder are estimated to be $5.5 million during fiscal 2015."

Obviously if this wasn't going on, that would be $5.5 million more to shareholders. Considering the adjusted operating income last quarter was just $11.8 million, $5.5 million is no small amount to this company.


Source:  Bob Evans Farms

Settle down, folks
Sandell believes the company is being mismanaged by CEO Davis and the board of directors. He believes there is much value that could be unlocked with a new board and new CEO. As an example of wasteful spending, Sandell back in December stated in a letter that Bob Evans spent $48 million on the recently constructed headquarters.  He purposely highlighted what he feels is an unnecessary and extravagant expense. Isn't Sandell being critical? Why do you say he thinks the extravagance is necessary? Nickey says: I meant this as a rhetorical question -- changed 

In the same letter Sandell went on to say:

We have recently learned of at least one private equity group which was said to have approached management with an acquisition proposal that was summarily dismissed by Chairman and CEO Steven Davis.

Ouch. Acquisitions can potentially be extremely lucrative and a fast way to improve shareholder value, and generally those discussions should at least be entertained.

Sandell most recently offered a settlement or a compromise that included such actions as replacing only some of the board members. He reported that the settlement was declined. Sandell stated:

More troubling from a financial point of view are the vast sums of shareholders' money that Chairman and CEO Steven Davis and his [b]oard are spending in their efforts to avoid change.

Pulling no punches
On July 9, Sandell released a battle cry of a press release. He pointed to the poor results and listed a number of alleged examples of wasteful spending at the hands of mismanagement. He wrote:

These results are due in no small part to a wasteful culture sanctioned by the [c]ompany's [b]oard of [d]irectors as well as the poor decisions made by Mr. Davis, which contributed to many issues that plagued Bob Evans in [f]iscal 2014.

On Aug. 8 the shareholder meeting is scheduled to take place. Sandell has eight directors up for vote that he is urging shareholders to elect. He said : 

Notwithstanding the issues that have plagued the [c]ompany under the leadership of Steven Davis and his [b]oard, we remain firmly convinced in the significant value that could be delivered to shareholders if the [b]oard was reconstituted with fresh and truly independent [d]irectors. Bob Evans has an iconic brand name and a unique collection of assets with the potential to deliver significant value to shareholders if managed appropriately.

Foolish takeaway
With any luck the upcoming shareholder meeting will mark the end one way or the other to this fight. Even more important is that a conclusion with eliminate the costs associated with the proxy battle and the time and distraction away from actually managing Bob Evan's business. Needless to say, it will be interesting to see who and what emerges after the vote; then Foolish investors can evaluate company in light of any changes that are made. 

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