Bob Evans Farms Inc.
) recently inked an agreement with LeDuff America to sell its
French-themed casual dining restaurant chain Mimi's Cafe for
$50.0 million. Of the total consideration, $20.0 million would be
paid in cash and $30.0 million in notes. Bob will provide certain
transitional services to the acquirer for up to one year.
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Last November, Bob Evans - the parent company of Mimi's Cafe and
its namesake brands -- had engaged an investment banking firm
specializing in the restaurant industry to evaluate the strategic
alternatives related to its Mimi's Cafe business segment and
optimize the company's asset in the segment accordingly to
enhance shareholder value. The latest deal is the outcome of that
engagement. The deal is expected to be sealed within the next one
and half months upon the fulfillment of customary closing
Why Mimi's Cafe?
Mimi's Cafe's 145 units in 24 states contribute around 20% of the
company's total revenue. The chain has been struggling for the
last few quarters. In Bob Evans' latest reporting quarter, the
second-quarter of fiscal 2013, Mimi's Cafe's comps plunged 5.6%
which resulted in a 4.7% decline in total sales. Mimi's Cafe's
adjusted operating loss was also wider than the prior-year
For the upcoming third quarter, management expects to post
adjusted earnings in the range of 51-57 cents per share that
includes yet another underperformance at Mimi's Cafe mainly due
to lesser focus on the brand resulting from the announcement of
the strategic review process.
Strategic Deal for Both Parties
On the other hand, the buyer LeDuff -- a U.S. based subsidiary of
France-based global bakery and restaurant company Groupe LeDuff
SA -- owns and operates a wide portfolio of cafe-bakeries, coffee
houses, boulangeries and related manufacturing units in North
America. Consequently, we expect both companies to derive
operating synergies from the deal as both of them operate in the
Probably, the Mimi's Cafe concept did not resonate well with the
parent company Bob Evans's long-term operational strategy. As per
Bob Evans management, casual dining segment's average exposure to
alcohol is 10% while Mimi's Cafe, primarily focusing on lunch and
dinner day-part commands only 3-4% share. This was due to the
lack of significant bar exposure of the parent company Bob Evans.
We believe that after the transfer, Mimi's Cafe will be well
handled as its new owner LeDuff has a proven track record of
operating a variety of renowned eatery brands including La
Madeleine Country French Cafe, Brioche Doree, Bruegger's Bagels,
Timothy's Coffee and Michel's Baguette.
Bob Evans currently retains a Zacks Rank #3 (Hold). However, we
believe, shares of Bob Evans should get a boost from this deal as
it eliminated its major operational hindrance. The divesture will
help Bob Evan to concentrate on its better-performing namesake
brands -- Bob Evans Restaurant and Bob Evans Foods segments -- as
well as meet its long-term goal to grow earnings per share 8% to
12% annually. The company will also receive a cash tax benefit of
$53 to $63 million to be realized over the next few years.
Merger & Acquisition: An Industry Trend
Bobe Evans is not the only fast food chain looking to vend slower
growth brands. In recent past, sell-offs and acquisitions gained
momentum in restaurant industry as these are a long-term strategy
to strengthen financial flexibility. To name a few,
Yum! Brands Inc.
) divested its sluggish Long John Silver's and A&W brands to
concentrate more on its star performers like KFC, Pizza Hut and
) dropped Arby's from its name so that it can concentrate on its
better performing Wendy's hamburger chain. Yet another company,
Frisch's Restaurants Inc.
) also sold all its Golden Corral operations last year.