Deals

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

Bob Evans is breaking up with Bob Evans, but don't worry, it's on good terms.

Finally, after years of prodding by activist Sandell Asset Management, Bob Evans Farms Inc. has decided to part with its namesake restaurant chain and divert its focus to the more profitable packaged-food business, which sells its famous breakfast sausages to other restaurants and branded breakfast sandwiches to convenience stores. 

This may not be the exact transaction envisioned by Sandell but shareholders seem just as pleased with this move. The stock popped 16 percent in after-hours trading Tuesday to $55.56 a share. Sandell had estimated in September that the company would be worth $57 to $66 a share using its own breakup analysis.

Tastes Good
Wednesday's trading will be the real test, but investors' initial reaction was excitement over Bob Evans selling its restaurant chain to Golden Gate to focus on making sausages and other foods sold elsewhere
Source: Bloomberg

Private equity firm Golden Gate Capital is buying the restaurant business for $565 million plus the assumption of certain liabilities, and Bob Evans estimates its net cash proceeds from the sale will be $475 million to $485 million, which will be used to pay off debt and fund a special dividend. Golden Gate -- which bought Red Lobster in 2014 after a similar activist-driven breakup at Darden Restaurants Inc. -- is paying 15 times Bob Evans Restaurants' trailing 12-month operating income. That's a fair valuation: over the past two years, U.S. restaurant chains have fetched a median of 13 times their trailing 12-month Ebitda in takeovers. And Golden Gate will have to contend with declining restaurant traffic. (Bob Evans also has through Feb. 28 to solicit counteroffers.)

Tough Crowd
Bob Evans, along with many restaurant chains in the U.S., is grappling with weak same-store sales:
Source: Bloomberg

It's a two-step deal, in which Bob Evans Farms is simultaneously acquiring Pineland Farms Potato Co. for $115 million to add to its side dishes, which the company projects will account for two-thirds of its sales volume by 2020. With this purchase, Bob Evans gains a processing facility that can handle 180 million pounds of potatoes. 

While the Pineland Farms purchase may be small potatoes, it was smart to announce the deal at the same time as the sale of the restaurants. It shows that management has a growth plan and is getting ahead of potential criticism that it's divesting the wrong half of the company. They also reaffirmed earnings guidance for fiscal 2017 (ending in April) and the board increased the buyback authorization to $100 million through the calendar year. 

Bob Evans served up just what investors needed. 

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