“We have made repeated attempts to engage in a dialogue with the company over a period of nearly five months for the sole purpose of discussing ideas which could deliver significant additional value to you, the true owners of Bob Evans,” Sandell said in the letter. “Unfortunately, management and the board of directors, aided by its financial advisers Lazard, have decided to take no action with respect to our ideas aimed at unlocking what we believe may exceed $80 per share of value associated with the company’s unique assets, apparently choosing instead to pursue ‘business as usual,’ despite the company’s abysmal earnings performance and concomitant stock price decline.”
For the second quarter ended Oct. 25, Bob Evans Farms’ net income fell to $6,119,000, equal to 23 cents per share on the common stock, down from $11,311,000, or 40 cents per share, during the second quarter of fiscal 2013. Sales for continuing operations ticked up slightly to $332,600,000 when compared with sales for the same period of the previous year of $329,555,000.
The company’s food business posted a loss of $3,017,000 during the quarter.
“In addition to the litany of impairment and other charges taken in the company’s FY2014 second quarter, the financial results that Bob Evans recently reported paint a very troubling picture regarding not only the company’s operating structure but the capital allocation decisions made by management,” the letter stated. “An increase in sow prices had a dramatic negative impact on the operating results of BEF Foods and was responsible for a staggering 23 cents per share reduction in the overall company’s EPS, further illustrating the strategic irrationality of combining a restaurant business and a packaged foods business under one corporate umbrella.”
Sandell estimated that Bob Evans’ Farm Fresh restaurant remodeling effort will cost the company $130 million by the end of fiscal year 2014. Yet the remodeled stores accounted for a same-store sales decline of 1.5% in the second quarter. Sandell called the remodel results “dismal” and far below Bob Evans’ family-dining peers that have not embarked on such an undertaking.
“This costly initiative and the company’s recently-constructed $48 million corporate headquarters are but two examples depicting what we believe are the misguided spending priorities of chairman and CEO Steven Davis,” Sandell said. “The fact that Mr. Davis and the board continue to discuss the pursuit of additional acquisitions is truly frightening given the value that was destroyed with the acquisition of Mimi’s Cafe.”
The shareholder expressed its conviction there has been a “complete governance breakdown at Bob Evans,” and noted that it learned of at least one private equity group that approached management with an acquisition proposal that was rejected by Davis.
“He similarly turned a blind eye to potential value creation in ignoring the repeated approach from a multi-billion dollar real estate investment firm proposing a sale-leaseback transaction with the company,” Sandell said. “That firm, in addition to a second multi-billion dollar real estate investment firm, continue to express to us a keen interest in pursuing a transaction with the company.”
As recently as Nov. 25, Sandell stated it has approached Bob Evans management about taking actions to bring its corporate governance in line with what the shareholder believes are best practices.
“Sadly, these constructive suggestions have been met with seeming disregard,” Sandell said. “We shareholders cannot afford to let this board, with its history of inaction, continue to operate with sub-standard corporate governance policies, particularly given the capital that chairman and CEO Steven Davis seems intent upon spending with no apparent return.
“As such, our consent solicitation will be aimed at swiftly empowering shareholders to seek change at the company. Importantly, shareholders do not have to wait until the company’s annual meeting to effect change, as they can take action by written consent.”
