Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

It's taken three years, but the Bob Evans breakfast chain may finally serve up what its activist investor ordered

Ham & Egg
Bob Evans is trading at its biggest discount to analysts' projections. No wonder its activist is making noise again. The investor thinks the company is worth at least 40% more in a breakup.
Source: Bloomberg

Sandell Asset Management has long wanted Bob Evans to separate its restaurant business from its packaged-foods division, which makes things like Bob Evans-branded sausage and frozen breakfast sandwiches that you can buy in supermarkets and convenience stores. In a sign that the New Albany, Ohio-based company may be moving in the breakup direction, Saed Mohseni, who became CEO of Bob Evans in January, had this to say on the company's first-quarter earnings call two weeks ago:

"The great thing about Bob Evans Foods and Bob Evans Restaurants is that both of these businesses are really independent businesses...And the synergies that exist between the two are mostly at the enterprise level rather than a division level."

His remarks are interesting because back in March 2015, under the old management, Bob Evans's board decided that there were too many beneficial synergies between the company's restaurant and packaged-food segments that would be lost in a breakup. Investors showed their displeasure by sending the stock plunging. Since then, the price has slid even further. That's particularly bad news for Sandell, which began accumulating its position when shares of Bob Evans traded for around $55 apiece, versus about $39 currently. The investment firm, run by Tom Sandell, has a 6.7 percent stake, making it Bob Evans's third-biggest shareholder, according to data compiled by Bloomberg.

Sandell said Monday that it's "encouraged by" Mohseni's comments and that they "finally quash the excuse previously advanced for avoiding a separation." The investor believes Bob Evans is worth $57 to $66 a share in a breakup scenario (you can see its analysis here.) 

Activist investors are often criticized for urging financial engineering that temporarily boosts a company's shares but doesn't improve its operations. In this case, though, it would make sense for Mohseni to want to siphon off the packaged-foods segment. See, Mohseni's more of a restaurant guy. Before coming to Bob Evans, he ran Italian restaurant company Bravo Brio and before that, McCormick & Schmick’s Seafood. 

Full Plate
Spinning off or selling the refrigerated and frozen foods would allow CEO Saed Mohseni to focus more attention on driving revenue at Bob Evans restaurants.
Source: Bloomberg

A separation could also prove timely. Since December, Bloomberg Intelligence analyst Michael Halen has noted that the packaged-food segment's sharp improvement in adjusted Ebitda and Ebit margin could "embolden" Sandell to once again call for a sale of that business. While its results didn't prove quite as impressive in the latest quarter because of volatile sow prices, they were still better than years past.

It's All Gravy
Bob Evans's activist shareholder Sandell Asset Management is reviving calls for the company to sell its packaged-foods business after that division's profitability improved.
Source: Bloomberg

While Mohseni said that the board "continues to evaluate all options" and is being advised during the process, it's not entirely clear whether he intends to follow through with a separation. What is clear is that Sandell isn't going away. And with the shares performing the way they have, it might be time to hear this activist out -- again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net