Under pressure from an activist investor, Bob Evans Farms (BOBE) CEO Saed Mohseni on Wednesday said that "all options" are on the table when asked if he would consider breaking the company's restaurant chain business from its packaged foods unit.The comments and strong first quarter profit and sales growth reported Wednesday sent Bob Evans shares up 7% in early trading, to $41.53 a share.
Many of the comments during a conference call to discuss Q1 results with analysts suggested that a new strategic review is underway at the company. The review also was hinted at in the last quarter's earnings call although one has not been formally announced.
However, Mohseni's answers - which didn't include a time line for the review -- are unlikely to appease activist investor Tom Sandell and his Sandell Asset Management fund, which continues a three-year public quest to have Bob Evans split or spin off the unit, BEF Foods.
The activists, according to a person familiar with the situation, believe that BEF Foods on a standalone basis, after it is spun off in a tax-efficient manner, could be valuable to a number of potential buyers including Tyson Foods (TSN - Get Report) , Hormel Foods (HRL - Get Report) , Pinnacle Foods (PF) , Campbell Soup (CPB - Get Report) and General Mills (GIS - Get Report) .
"I've been very, very clear that all options for Bob Evans are under consideration by our board of directors," Mohseni said in a call with analysts. "The ultimate goal is to give our shareholders the best return rather than the quickest return and both businesses have tremendous amount of opportunity for upside. Our board is very much committed to finding ways that can enhance shareholder value.
"The comments and positive results, driven by its packaged foods division, didn't appear to appease Sandell who raised questions about the review on the analyst call. "Are you getting closer towards a final transaction? It has taken a little bit of time here. What is the time line here? How much longer do we have to wait for the company to realize the value and full potential of Bob Evans?" Sandell asked.
Top Bob Evans executives also responded to questions, including a few from Sandell. Their responses raised questions about whether the company's board would seriously consider a spinoff of either the restaurant chain or the packaged foods division. Mohseni declined to put a deadline on how long the company's review might take. In addition, Sandell sought unsuccessfully to have Bob Evans reveal the name of its financial advisers. The name of the advisers could help provide some indication of whether a separation is seriously being considered. Mohseni said Bob Evans continues to work with a "top rated financial group" but he declined to name it.
The lack of clarity around the strategic review and its time line suggests that Sandell may escalate his insurgency. Bob Evans staved off a 2015 proxy fight with Sandell - on the eve of a deadline to nominate dissident director candidates the company agreed to carry out one of Sandell's demands, a sale-lease back of between 30% to 60% of the company's real estate. (They completed a sale-lease back of roughly 30% of the real estate).Also, Sandell, a veteran of dissident director proxy fights, already succeeded at installing a minority slate of four dissident directors to Bob Evans' board in 2014 at a contest that went the distance. The activist fund issued an 18-page presentation Aug. 26 suggesting that it believes BEF Foods could have a value of roughly $1.2 billion on its own. That suggests the BEF Foods unit's value exceeds the company's entire enterprise value, combining debt and market capitalization of $774 million, suggesting that the market is valuing the restaurants negatively.
And two people familiar with the situation noted that Bob Evans bylaws permit shareholders to call a special shareholder meeting or launch a so-called consent solicitation as mechanisms to nominate dissident director candidates. In other words, Sandell would not need to wait until the company's 2017 annual meeting to seek to elect new dissident directors to help drive the separation goal.
Stephen Anderson, analyst at Maxim Group LLC, noted that Bob Evans officials had said last quarter that all options were on the table for the BEF Foods unit. However, he suggested that Mohseni's comments Wednesday suggest that he is clearly more amenable to "getting something done" in terms of a separation. Anderson pointed to Mohseni's comment that BEF Foods and the restaurant chain are "really independent businesses" to back up his assertion.
The New Albany, Ohio-based company reported first quarter 2017 net income of $9.2 million, or $0.46 a diluted share, up from profit of $4.3 million, or $0.19 a share during the same period last year. The results beat the mean earnings per share estimate of $0.44 cents a share, according to FactSet. The BEF Foods unit did well - its net sales were $85.9 million, up from $83 million in the same period last year. However, the restaurant unit's quarterly net sales were only $220 million, a decline of $18 million from its results during the same period in 2015.