BOBE Bob Evans Farms, Inc. (delisted)

An activist shareholder has a beef with the board he helped install at Bob Evans Farms Inc.

Thomas Sandell won a third of the company's 12 board seats in an August 2014 proxy fight. The revamped board subsequently shot down one of Mr. Sandell's main ideas for Bob Evans: a separation of the packaged-foods unit from its restaurant-chain business.

Now Mr. Sandell's firm, Sandell Asset Management Corp., which owns nearly 7% of Bob Evans' shares, is waging a noisy campaign against the board he helped select.

Since December, Mr. Sandell has sent board members several letters urging them to consider separating the highly profitable unit that sells Bob Evans branded sausages, macaroni and cheese and potatoes in grocery stores throughout the U.S. He also has pushed the idea of a spinoff or split during 30 meetings with Bob Evans officials since his proxy fight.

Last week, Mr. Sandell ratcheted up the pressure when he asked Bob Evans CEO Saed Mohseni what the company was doing to unlock the value of the packaged-foods unit during an earnings call.

If they can't reach a compromise, Sandell could wage another proxy fight. Shareholders can propose board candidates between April 21 and May 21 for this summer's annual meeting.

Fights between activist shareholders and public-company boards are common these days. But a public spat between an investment fund and a board of directors it helped reshape "is unusual," said Suraj Srinivasan, a Harvard Business School professor who studies the impact of activist board members. "I can't think of a similar case."

Bob Evans, which previously hired investment bank Lazard Ltd. to review options, concluded in March 2015 that the packaged-foods business was too small to be a stand-alone company and that the move could result in hefty taxes. The Internal Revenue Service is considering changing rules for spinoffs, which means they wouldn't necessarily be tax free.

During Bob Evans' March 2 earnings call, Mr. Sandell argued that the packaged foods business, which has improved since last year, could be worth more than $1 billion as a stand-alone enterprise. That would exceed the $976 million market cap for the entire company.

"Valuations in this space have rarely been higher and there is no guarantee the iron will stay hot," Mr. Sandell said in a statement in a response to a Wall Street Journal query.

The Bob Evans restaurant business, however, has been struggling. The chain of 548 family-style restaurants in 18 states, located mostly in the Midwest, mid-Atlantic and Southeast, posted a 3.6% decline in same-store sales in its fiscal third quarter.

Douglas Benham, Bob Evans chairman and a Sandell board pick, has a different view. "Our results have gotten better, so any potential transaction would have a better return at this stage of the game," he said in an interview. "But the tax issues haven't changed."

Nor do Bob Evans board members want to do something "that's going to make the stock go up on a short-term basis without creating sustainable long-term value," Mr. Benham added.

The revamped board has taken numerous steps that Sandell favored, including hiring a new chief executive, selling the corporate jet and increasing stock buybacks and dividends.

"A lot of good things have happened since the proxy fight," a person familiar with Sandell said. But finding a way to extract value from the packaged-foods business remains "an incredibly important piece of the puzzle."

In the fiscal third quarter ended Jan. 22, operating income for the packaged-foods unit rose 26% compared with a year ago as the company consolidated plants, made them more efficient and sold more refrigerated side dishes, which carry higher margins than sausage.

Overall, "the business is much more profitable now than it was 12 months ago and my hope is it will be even more profitable in another 12 months," Mr. Mohseni, who took the helm in January, said in an interview.

Sandell would like Bob Evans to spin off rather than sell the packaged foods business so that shareholders benefit twice—first by acquiring shares in the new company and then by getting a bump when the stand-alone business sells.

Though Bob Evans directors "haven't ruled out anything," they won't separate the unit simply because Mr. Sandell likes the idea, another person familiar with the matter said. "Companies can't run on one investor's time frame," this person said.

(END) Dow Jones Newswires

March 10, 2016 16:45 ET (21:45 GMT)

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