Activist Investors Gang Up on Bob Evans Farms, Inc.

For the second time in two weeks, family dining chain Bob Evans Farms is being taken to court over its decision to strip shareholders of their rights. Because the board of directors is clinging tenaciously to its seats as activist investors seek to chart a different course for the restaurant operator, it will have to defend its decision to adopt a requirement that an 80% supermajority is needed by shareholders before they can amend the company's bylaws.

Source: Bob Evans Farms.

Not only does Bob Evans run a nationwide string of restaurants, but it's also a vertically integrated company that sells packaged meats, potatoes, and other convenient meal ingredients not only to others but to its own restaurants as well. Hedge fund operator Sandell Asset Management claims the restaurant's shares are underperforming because it's weighed down by the dual nature of its businesses, and the resulting "conglomerate discount" is hurting both.

The BEF Foods division realized almost $377 million in sales in fiscal 2013 and anticipates growth of 10% to 15% this year. Packaged food represents 23% of the restaurateur's total revenues, yet it recorded $137 million in operating losses, causing a consolidated loss of $44 million for the year, a big swing from the $107 million profit the year before. While it will be raising prices this year to offset rising sow costs, it forecast non-GAAP earnings of $2.60 to $2.65 per share, slightly below its prior outlook. By spinning off the packaged-goods business, however, Sandell believes investors would benefit from management being more focused.

Management rejected the suggestion and in the process adopted the supermajority requirement. Two weeks ago, the hedge fund sued Bob Evans for the move and now the Oklahoma Firefighters Pension & Retirement System announced it, too, is taking the restaurant chain to court because of it. According to the complaint it filed last week, "When directors of a publicly traded company take such brazen action to render themselves immune from a consent solicitation, the only logical conclusion is that they are motivated by deceit and entrenchment."

Family and casual-dining restaurants have been a target-rich environment for activist investors because they've largely been lagging other growth-oriented concepts like fast food and fast casual. Darden Restaurants is in a bit of a pitched battle with two hedge funds ganging up on it over its plans to spin off the Red Lobster chain. Their complaint is that the strategic realignment doesn't go far enough and they want the Olive Garden chain included in the spinoff as well as the creation of a real estate investment trust to hold its far-flung property portfolio. Darden management is also pushing back against the proposals.

With Cracker Barrel, which like Bob Evans operates a dual restaurant-packaged goods business and is being pestered by Biglari Holdings' Sardar Biglari, the complaint there isn't to split the company up but rather to pay out more money to shareholders. Cracker Barrel, however, may have worn down its critic, as Biglari recently asked the restaurant operator to buy him out and let him go away.

Bob Evans isn't so fortunate. The board has been acting imperiously for some time, as the pension fund notes that even though shareholders in 2011 met the 80% supermajority requirement the chain had imposed and voted to eliminate it, the board reinstated the rule anyway later on.

Shares of Bob Evans Farms have lost a fifth of their value over the past few months as management has pushed back against the proposal, and with investors lining up to take a swing at the board for its regal air, we may see the stock led to the guillotine to shave off more than a few more points from its neck.

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