Due to the pending catalyst and general familiarity with the story, I will keep this write-up short-and-sweet.

 

Bob Evans is an operator of ~580 restaurants around central America that had been around since 1946. It happens to own > 80% of its real estate and derive ~20-25% of its EBITDA from its packaged/frozen food division. We believe that a normalized FCF number should support ~$60-70 / share in value, and catalyst is imminent to unlock such value.

 

Sandell Asset Management had been involved since September 2013 and unfortunately got in around not only around S&P highs, but also when the hog virus began to rear its ugly head. Nonetheless, the firm laid out a proposal to unlock several venues of value:
- Sell all or part of its real estate, pointing to ~$900 mm in value and indicate that it has already attracted 5 unsolicited bids. ARCP comes to mind.

- Evaluate strategic initiatives for its BEF packaged food division. Given HSH's recent 13-14x bid, BOBE's 8x bid provides interesting multiples expansion opportunity.

- Evaluate its cost structured to bring SG&A in-line w/ industry peers. Sandell points to as much as 500 bp of sales in cost ot be shed.

- CapEx normalization from 10% of sales to 3-4% of sales.

 

Besides the obvious financial engineering to unlock idle assets, Sandell also proposed to bring in experienced restaurant veterans to improve the underlying restaurant operation. In this case, BOBE had suffered over 7 straight years of traffic decline / store but barely held on to sales as it increases price by 2-3% per annum and cutting restaurant staff & hours by ~25% since. The wide menu items selection, high concentration of meat products, sometimes overly generaous portions (given the demographic of children and elders), and a fancy headquarter w/ 500+ staff certainly don't help their case. Given the nation's trend towards home & healthier cooking, and the declining automobile traffic (BOBE's restaurants are around road-side, strip-malls, etc), the restaurant cannot raise price & cut staff forever and could face serious profitability cliff if nothing gets done.

 

Sandell's 2 pitches can be found below:

http://www.sec.gov/Archives/edgar/data/33769/000090266414002215/0000902664-14-002215-index.htm

http://www.sec.gov/Archives/edgar/data/33769/000090266414003273/0000902664-14-003273-index.htm

 

In any regards, BOBE's management had been reluctant to change. Over the past 11 months, Sandell and BOBE had gone through various stages of non-action, threats of consent soliciation, and back-and-forth jabbing with no avail on either end. This stalemate is set to change very quickly:

- In the upcoming Aug 20 annual meeting, shareholders are set to vote for the board of 12. Sandell nominated 8 and BOBE nominated 12.

- As of today, ISS announced its support to Sandell's proposal and suggested shareholders vote with its GOLD proxy. This is a significant development that has been underplayed by the market currently. Not only the significant mutual / index fund holdings will likely side w/ Sandell (we have no way of knowing given the potential HF involvement pending the next 13-F), but during investor meetings we believe even the company voices its intention to reach some sort of a settlement w/ Sandell, Should ISS Support Sandell's plan. This vote of confidence lifts major overhang towards the uncertainty on Aug 20 vote, and in our mind clears a straight shot for BOBE to realize its value.

- We believe now is the prime time for any other activists' involvement via 13-D to support Sandell's proposal.

- We believe any 13-F filings w/ activist involvement should help Sandell's case on or before Aug 15.

- We believe that, even without the annual meeting, Sandell and any potential activists can still act by consent solicitation to drive change.

 

In our math, assuming BEF Food does not get sold, if BOBE can simply (1) improve sales to $1.4-1.5 Bn, (2) Lower COGS % form 33-34% to ~31-32% similar to historical, (3) sell 50% of real estate for $450 mm, buy back 9 mm shares, and keep D&A+Rent in-line, (4) cut SG&A cost by 200-250 bp, and (5) lower CapEx spend to ~$50-60 mm per annum, it is set to generate $100 mm of levered-FCF on the basis of ~14-15 mm shares, or $6.5-7.0 / share. Assuming 10% l-fcf yield, BOBE should be trading at $65-70 / share with significant improvement of ROIC from ~7-8% current to 25%+. Multiple venues such as licensing, deleveraging, franchising, and potential growth can further buttress its valuation.

 

Downside risk remains that if Sandell does not win or the restaurant operation deteriorates rapidly. It is also possible that the new board and management, once elected, screws up the operation JCP-style. But this is where we place our bets - we see the upside asymetric in the sense that if Sandell wins (>50% chance now given ISS support), we have a short-term bump w/ potential to long-term 10-15% annual return w/ FCF. If Sandell loses, BOBE still has a 2.5% dividend and significant Real Estate story for years to come - w/ potential downside supprot @ $40 / share. The key is that we do not believe any significnat improvement is baked in to the stock what-so-ever. It is impossible to screen well, top-line drops, the sell-side remains reluctant to bake in any change in the model, and the name remains too small to be noticed by major league players.