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Proxy Advisor Backs Four Activist Board Nominees at Bob Evans

NEW YORK (The Deal) -- In a partial blow to Bob Evans Farms (BOBE - Get Report), proxy advisory firm Institutional Shareholder Services  on Friday recommended that shareholders support four of eight dissident director nominees put forth in a bid to take control of the family restaurant chain by activist investor Sandell Asset Managementp.

The split ISS vote may have an impact since the New York-based activist investor is seeking to elect eight dissident director nominees on the New Albany, Ohio-based company's 12-person board at its Aug. 20 annual meeting. Shareholder backing to install four dissidents would only put Sandell's candidates in the minority on the board while support for all eight would put the dissident in control. The recommendation is important because institutional investors often consider it as a key factor in determining how to vote on proxy contests. Nevertheless, another key issue will be how the other major proxy advisory firm, Glass, Lewis & Co. LLC, recommends shareholders to vote. Glass Lewis is expected to release its report early next week.

ISS recommended in favor of Charles Elson, chief of the University of Delaware's Center for Corporate Governance, as well as Doug Benham, former president of Arby's Restaurant Group Inc. and David Head, the former president of O'Charley's Inc. and Annelise Osborne, a senor credit officer at Moody's Investors Service Inc.

"As the dissident has made a compelling case that change to the board is necessary to improve its oversight of operations, strategy, and asset and capital utilization, as well as its alignment with shareholders, votes on the GOLD dissident proxy card FOR dissident nominees Benham, Head, Osborne, and Elson are warranted," ISS said in a report obtained by The Deal.

Sandell's press release citing the ISS recommendation notably fails to explain that the proxy advisory firm only supported four of the fund's nominees, the latest proxy-contest related release that seeks to spin the results as both sides of the battle seek to control how a proxy fight is presented to stakeholders. Sandell is run by Thomas Sandell.

The ISS recommendation comes as Sandell, which owns a 7.6% stake, has been pressing the company to split its restaurant business from its packaged foods business, BFF Foods, arguing that it suffers from a "conglomerate discount" because of its two business units. He also would like to see the company, which owns 86% of its restaurants, perform an analysis to determine the best means to unlock value with its "vast real estate holdings." Dissident investors in the retail and restaurant space, including activist Starboard Value LP and its insurgency at Darden Restaurants Inc., have been pressing companies into sale-leaseback agreements with its real estate. Calls to Sandell and Bob Evans were not returned.

It also comes after Bob Evans, which has a $1.1 billion market capitalization, in late January made changes to its corporate governance structures, under pressure by Sandell. Earlier in January, Sandell filed a lawsuit in the Court of Chancery in Delaware against Bob Evans seeking to remove a bylaw that requires a super majority of 80% of more of participating shareholders support to amend corporate bylaws. In response, the company agreed to add between one and three new independent directors and drop the vote required to amend its bylaws to 50% of outstanding shares.

Sandell had originally sought to launch a consent solicitation to elect directors to the company but he later changed his effort to a more traditional proxy contest.

In addition, in April, Bob Evans CFO resigned, under pressure from Sandell. In addition, the activist raised concerns in June that the company postponed its fourth quarter earnings call from June 17 to July 8. In June, Bob Evans offered two seats on its 12-person board to Sandell's nominees but the dissident investor rejected the offer, arguing it was a "meaningless effort designed to be rejected."

In July, Bob Evans reported same store sale of -4.1% for the fourth quarter of 2014 and -2.1% for fiscal 2014 overall. It added that "severe winter weather" adversely impacted the chain's sales, cost of sales and operating wages and expenses.

Lately, the battle has become quite heated as the two sides enter the final few weeks before the contest. On Aug. 5 Sandell sent letter to Bob Evans saying he believes that there is a very real financial danger posed to shareholders if comprehensive change is not accomplished in the near-term. Sandell also argued that the board has enabled a "wasteful and spendthrift culture" with "extravagant" pursuits including the construction of a $48 million corporate headquarters and purchase of a new 2013 Bombardier Challenger 300 corporate jet.

Meanwhile, Bob Evans sent a letter Aug. 6 stating that Sandell's economic agenda is "unsustainable" and would "jeopardize long-term sustainable value creation." The company added that Sandell's latest suggestions to operate the business are of "limited utility" or are already being implemented by the company.

Top activist legal team Marc Weingarten and David Rosewater at Schulte Roth & Zabel LLP provided advice to Sandell. Bob Evans financial advisor is Lazard.

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