(1) Separate BEF Foods – While the prospects of a sale of BEF Foods should be thoroughly investigated, we believe that an IPO of BEF Foods as a pre-cursor to a spin-off or a split-off is also possible; the scarcity value of a publicly-traded packaged foods business could be meaningful and we reject the notion that the sale of a 19.9% equity stake in BEF Foods would be too small. At a previously-cited BEF Foods valuation of approximately $560 million, a 19.9% equity stake would be worth in excess of $100 million and we point to the successful $95 million IPO of Annie’s, Inc. as an example of a packaged foods company smaller than BEF Foods that was embraced by public investors. A spin-off or split-off of BEF Foods subsequent to an IPO could then be pursued on a tax-advantaged basis. Importantly, the management of BEF Foods could be compensated with stock and equity-linked securities of BEF Foods, enabling management to directly profit from the growth in the underlying business.
(2) Real Estate Sale-Leaseback – Our previously-cited valuation of approximately $720 million for a sale-leaseback of the owned real estate of Bob Evans Restaurants assumed incremental rent expense equal to 6% of owned restaurant revenue capitalized at a 7% cap rate. Subsequent discussions with real estate professionals give us significant comfort as to our valuation assumptions and we have received two separate, unsolicited approaches from multi-billion dollar real estate investment firms indicating their desire to pursue a transaction with Bob Evans. We strongly believe that a significant sale-leaseback transaction with both parties could be easily executed within 60 days.
(3) Repurchase Stock via Self-Tender(s) – The Company should provide absolute certainty to the investment community that it will repurchase a large number of shares via self-tender as opposed to an amorphous share repurchase “authorization.” To wit, the Company announced a $175 million share repurchase “authorization” on August 19 yet we see no evidence to date that the Company has purchased $175 million worth of shares. We are well-aware of companies who have “authorized” share repurchases yet have failed to make good on said “authorizations,” along with those that have set self-tender prices artificially low to discourage participation. Based on the above, we believe the Company could easily pursue, in very little time, a $575 million self-tender financed from the incurrence of $175 million in additional bank debt along with $400 million in sale-leaseback proceeds (for approximately 56% of the owned restaurant real estate). This could be followed by a split-off or subsequent self-tender with the proceeds from the separation of BEF Foods (either the sale of a 19.9% equity stake or a sale in its entirety) along with additional sale-leaseback proceeds. To dissuade the Company from setting unrealistic self-tender prices, Bob Evans should commit to return all proceeds not utilized in any self-tender via a one-time special dividend.
It is our belief that a pro-forma stock price of approximately $80 per share could be justified if the Company were to pursue the steps outlined above, which assume: (1) the Company raises $175 million in incremental debt and $400 million in sale-leaseback proceeds and implements a $575 million self-tender at a price of $63 per share; (2) the Company pursues a tax-efficient split-off of BEF Foods at a valuation of 11.0x FY2015E EBITDA, with BEF Foods shares exchanged for Bob Evans shares at a price of $63 per share; and (3) the resulting Company trades at 9.0x adjusted FY2014E EBITDA, which may be conservative given that other publicly-traded family-dining companies such as Cracker Barrel and DineEquity have appreciated significantly and are now trading close to or in excess of 10.0x 2014E EBITDA. To reiterate, the preceding assumes only a $400 million sale-leaseback transaction; should the Company raise additional sale-leaseback proceeds and return such cash through a one-time special dividend, the total consideration received by shareholders of Bob Evans could be materially in excess of $80 per share. (To put a fine point on it, should the Company ultimately raise approximately $720 million via sale-leaseback and pay out the incremental after-tax proceeds as a one-time special dividend to the post-tender, post-split-off shareholders of Bob Evans, the total consideration received could approximate $90 per share.)Given the many different financial alternatives available for the Company to consider, the Company’s current purported use of “outside advisors” gives us possibly the greatest degree of concern. Steve Davis indicated that the Company has “outside advisors” and claims to have shared our thoughts with these “outside advisors,” yet has refused to share with investors the identity of these “outside advisors.” Accordingly, we have no way of knowing what value is being added by these “outside advisors.” If the Board was truly serious about taking steps to enhance shareholder value, Bob Evans would have formally retained a reputable investment banking firm to advise an independent committee of Board members and publicly announced such action so that the investment community could have comfort that the Company is being appropriately advised. As it now stands, we have no comfort whatsoever in any “outside” advice that the Board is purportedly receiving, particularly considering that there has been no ostensible action on the part of the Company to enhance shareholder value in the face of the numerous alternatives that it could pursue.