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Bob Evans as Cheapest Restaurant Invites LBO Takeover: Real M&A

There may never be a better time for private equity buyers to profit from sausages and family dining.

Bob Evans Farms Inc.’s equity and net debt was valued at 6 times earnings before interest, taxes, depreciation and amortization yesterday, making it the cheapest U.S. restaurant chain with a value greater than $1 billion, according to data compiled by Bloomberg. With Bob Evans projected to post record profit next year and holding only $97.5 million in net debt, the Columbus, Ohio-based owner of the namesake restaurants may lure bids from leveraged buyout firms, said Miller Tabak & Co.

Tracing its roots to a diner near the founder’s farm in 1948, Bob Evans is now grappling with rising pork prices and falling revenue at its Mimi’s Cafe chain, offsetting higher sales of sausages and side dishes to grocery stores. A private equity buyer could sell the Mimi’s Cafe unit and renovate more of Bob Evans’s 564 locations, according to Miller Tabak, or sell some of its real estate, said Capstone Equities LLC. An LBO firm may pay a 20 percent premium, said Morgan Keegan & Co., or about $1.2 billion, exceeding the 5.7 percent gain analysts estimate in the next 12 months, data compiled by Bloomberg show.

“It’s viewed as a company that’s undervalued,” Destin Tompkins, a Nashville, Tennessee-based analyst at Morgan Keegan, said in a telephone interview. “They have a lot of different business lines and they own a lot of real estate, so there would be some options for a private equity owner to try to monetize some of their assets. It’s entirely possible that management is a little bit more open-minded to a sale process at this point.”

Scott Taggart, a spokesman for Bob Evans, declined to comment on market speculation.

Today’s Trading

Bob Evans rose 0.9 percent to $34.74 in New York today. The company, which first sold shares to the public in 1963, climbed 20 percent in the last two years through yesterday, trailing the 31 percent gain for the Standard & Poor’s 400 Consumer Discretionary Index.

In the year ended April 2011, Bob Evans’s food product sales to grocery stores grew 1.8 percent to $333.6 million, while restaurant sales fell 3.8 percent to $1.36 billion, led by declines at Mimi’s, according to a regulatory filing. Restaurant sales have dropped for three straight years.

The company’s enterprise value of $1.11 billion yesterday represented 6 times its Ebitda in the last 12 months, the lowest multiple among 15 U.S. restaurants with market capitalizations of more than $1 billion, data compiled by Bloomberg show. The industry traded at a median of 9.8 times Ebitda.

‘Enormously Undervalued’

At its closing price of $34.44 yesterday, Bob Evans traded at a 37 percent discount to its sales, the second cheapest in the group after Cracker Barrel Old Country Store Inc.

“We think it’s enormously undervalued,” Josh Zamir, managing principal at Capstone, a New York-based private equity firm that owns shares of Bob Evans, said in a phone interview.

Bob Evans rose 1.6 percent to a five-month high on Jan. 6 after DealReporter, citing people it didn’t identify, said the company may be a target for private equity and may start a sale process soon.

While Bob Evans is projected to reach record net income of $77.9 million in fiscal 2013, the company’s 6.2 percent operating margin in the last 12 months is the lowest in the industry, data compiled by Bloomberg show.

A private equity buyer may seek to sell the Mimi’s Cafe chain, according to Stephen Anderson, a New York-based analyst at Miller Tabak. The company’s 145 Mimi’s Cafes, French-themed diners where a meal averaged $11.27 in fiscal 2011, have been a drag on Bob Evans’s valuation, he said in a phone interview.

‘On the Block’

“Private equity might give them the opportunity to do some more cost reductions and maybe get rid of Mimi’s Cafe,” Anderson said. “It’s becoming more likely than not that Mimi’s will be on the block.”

Zamir said Mimi’s may fetch about $200 million. Bob Evans bought the chain in 2004 for $182 million.

“The present management is diverting a significant amount of their efforts on Mimi’s, which we think is a distraction,” Zamir said. “At some point you just have to throw in the towel and let someone else either buy it or take it over.”

As a private company, Bob Evans could close underperforming locations and renovate more restaurants to drive traffic and sales, Anderson said. The company already plans to remodel all Bob Evans locations, where a meal averages $8.45 a person, within five years, Chief Executive Officer Steven Davis said on a Nov. 16 conference call.

Selling Real Estate

A buyout firm should also consider selling Bob Evans’s land and buildings and then renting space back, said Zamir, whose firm Capstone specializes in real estate. Bob Evans’s real estate may be worth as much as $850 million, he said.

“They could take on debt to make the acquisition and then sell off a bunch of real estate to pay down the debt,” Zamir said.

Bob Evans had $1.18 billion in land and buildings as of April, according to its annual regulatory filing. The company owned about 86 percent of the real estate for its Bob Evans chain as of then, filings show.

Any buyer would be entering an industry that’s faced declining revenue. Sales at full-service restaurants in the U.S., including casual-dining chains such as Bob Evans, fell 1.3 percent to $166 billion in 2010 from a year earlier, according to data from Chicago-based industry tracker Technomic Inc. Sales at limited-service chains rose 1.9 percent in the same period.

‘Treading Water’

“The whole family dining segment has been a mixed bag in recent years,” Anderson said. “Bob Evans has been treading water in this kind of environment.”

Still, Bob Evans’s food products division, which sells refrigerated entrees and frozen breakfast sandwiches in grocery stores, is growing faster than the restaurants and its product lineup could be expanded, said Morgan Keegan’s Tompkins. Because the stock currently undervalues the food products, selling the business is also an option for a private equity buyer, he said.

Bob Evans’s management may be willing to sell the whole company for a 20 percent premium, said Tompkins. That would equate to $41.33 a share based on yesterday’s closing price. As a standalone public company, analysts project the stock will reach only $36.40 in the next 12 months, according to estimates compiled by Bloomberg.

“There’s a lot of value to be unlocked,” Michael Glickstein, chief investment officer for New York-based G Asset Management, which owns shares of Bob Evans, said in a phone interview. “Unlocking value with the real estate is one step. Another is achieving the right valuation for the high-growth food products business, and another step would be to sell or separate Mimi’s, the underperforming business that’s dragging the whole valuation of the company down. It would be attractive to private equity.”

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